Navigating the Maze: IPO


Since initial public offerings are one of the lesser understood financial transactions, this blog is meant to explain them in a simple and straight-forward way. Our previous blog explained some important prerequisites to consider prior to an IPO, and this blog will walk through how they actually work. We encourage you to review our first blog on this topic to understand if you are ready and what steps need to be taken to prepare.

Registration Statement (S-1)

The first step in an IPO is the S-1 form, which gives a fairly basic overview of the company. Main headings include historic income statement, balance sheet, shareholders equity, and earnings per share figures for the last two or three years, management’s discussion and analysis, and some other items. For anyone who is familiar with 10-K’s and other financial documents, the S-1 is very similar; the difference is that the company as a whole has never done it before, so you have to start from scratch. This can be one of the most time consuming parts and should be coordinated very well.

I would also suggest looking through a few S-1’s to get a feel for what they include and what they look like. Even if you are only thinking about going public somewhere down the road, understanding the basic outline will help to plan for it.

Road Show

The road show is the step that people may be more familiar with, especially if you have ever worked in the securities industry. The idea here is that the initial investors— the ones who buy shares directly from the company—are usually institutional investors and stock brokers, as opposed to retail investors. The investment bankers will set meetings up where management can pitch the investment opportunity to investors, with a targeted amount to raise. These are the most important meetings at which management will present, which means that preparation is key. You have to anticipate what kinds of questions potential investors will ask—regarding your outlook of your industry, forecasts for your revenue, expenses, or profit, how you’ll be handling certain tax issues, expansion plans, etc. The ability of management to answer these questions confidently will have a major influence in the success of the offering.

For example, when Vivint Solar (a local Utah company) did their roadshow, CEO Greg Butterfield shared some questions he was commonly asked in a Fortune magazine article last year. He said that other than general strategic questions about SolarCity (their top competitor in the U.S.) and Vivint, he was asked what happens if or when the homeowner moves. He would answer that the solar panels 100% transition to the new homeowner. It was a simple enough question, but had they not thought through that scenario, their credibility could have been damaged.

The Offering

If you get too far into the weeds of the offering, it can get pretty confusing, so here is a simplified overview. On the day of the offering, the company sells a pre-determined amount of shares to the investors at a pre-determined price, which are both decided during and after the roadshow. The initial investors are then free to do whatever they want with the shares; keep them or sell to the public. This is about the time that retail investors can hop in and invest.

A very important aspect to understand about this process is how the price is determined and the fees associated with the entire transaction. The investment bankers, lawyers, and accountants will have some type of fee based on the size of the transaction, but the investors are looking for a spread. This means that they will require some kind of discount to the market price for taking on that risk, and if they decide to sell later, they want to know that they will be able to make a profit. At the same time, the company is trying to get as much out of the offering as they can, so thus the genesis of negotiations.

Just to reiterate, this is a very simplified explanation. Many steps involve a great deal of time, the details of which cannot be covered in an article this short. Preferred CFO has operated in Utah for years and can help businesses navigate the current economic environment and help them understand this process more completely.