Positioning your Company to become an IPO
This article is from the Investing Articles: Public Offerings: IPO and DPO series.
Positioning your Company to become an IPO
Becoming a public entity forever changes the way your company does business. Going public--offering a privately owned company's securities for sale to the general public--is an enormous decision for a business owner.
Here are some terms and tips to help you work through the maze:
When this first-time sale of securities occurs, it is referred to as an initial public offering, or IPO. When a company sells its unissued securities and receives additional capital, it is a primary offering. A sale that sells the company's owners' securities and gives the proceeds to the owners is called a secondary offering.
IPOs are almost always primary offerings.
If you're considering going public, most likely it's because your company is experiencing growing pains. A company usually considers going public when the money it needs for expansion and growth exceeds its debts.
However, needing capital and going public do not necessarily go hand in hand; in fact, an IPO may not be the best alternative. Consider these conditions to decide if your company is a candidate for public offering:
- Has your business shown a sustained or increased growth rate high enough to attract investors? A company is considered an IPO candidate when annual sales revenue totals at least $20 million and profitability is $1 million or more.
Initial Public Offering (IPO) Process
- What about potential investors? Since they're interested in seeing current income as well as long term appreciation of their investments, investors look for vehicles to increase their assets.
These investors consider several factors when deciding if a new stock can yield a return on investment with an acceptable degree of risk: your company's business plan, management depth, potential for growth and ability to maintain strong sales and earnings growth.
A company possessing these characteristics will likely attract investors.
- Do the benefits outweigh the costs of going public?
If so, you are ready to take the plunge.
Doing the right thing at the right time is essential to success, and it demands consulting and planning with experts. Such experts advise developing an orderly plan designed to be carried out over three years.
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First, a company should develop a reliable management team that includes professionals in marketing, production, research and finance. Next, develop realistic, reasonable budgets, because as the IPO process unfolds, underwriters and analysts will request projections and compare your company's historical performance to past budgets. Third, obtain an outside board of directors; most exchanges or markets require at least two outside directors. Fourth, build a positive public image for your company well before going public.
Money spent on a capable consultant here is money well-spent.
And whenever large amounts of money are involved, so are government regulations. The Securities Exchange Commission (SEC) regulates security offerings and trade, with an eye toward maintaining fair and orderly markets. Each state also has its own securities laws that vary in content. You will be required to register securities prior to public sale.
Margins and growth: The numbers
Securities are sold in a number of markets or stock exchanges: The New York Stock Exchange and the American Stock Exchange are the two major players, and a listing on either of these is considered prestigious.
However, most companies going public choose the over-the-counter market, the market for negotiated transactions rather than the auction marketplace associated with the securities exchanges.
The actual "going public" process takes three to five months from the time your company decides to go public until the time it receives proceeds from an offering.
Financial consultants will help you from that first hand-holding step to the actual sale.
What is the IPO Process?
When it comes to accounting and reporting issues, these financial consultants not only ease the burden but keep you from getting into trouble. For instance, if you have never issued audited financial statements, conforming to the requirements may seem impossible. Financial statements must be prepared in accordance with generally accepted accounting principles, and the SEC requires certain accounting disclosure statements.
And the consultant will steer you through the multitude of state, gift and income tax planning opportunities to consider, also.
Finally, once your company has become a public entity, it must maintain investor enthusiasm or trading may decline. Developing and using an after market plan with the aid of financial consultants helps keep the trading brisk and makes your decision to go public the right one.