An initial public offering (IPO) is the process by which a private company sells unissued securities to raise capital from the public. This can be and usually is a very long process and should be approached with much thought. This two-part blog is written to assist you in the decision to go public and what the process involves. First off, there are many reasons that a company would decide to IPO.
- Once public, a company can more easily and readily access the capital markets
- It enables them to acquire other companies using publicly traded stock as currency
- It enables them to attract and retain talented employees
- Owners/founders may want to liquidate their shares
- It can improve the company’s reputation
Need For External Capital
One of the greatest of these reasons is the need for additional funds to grow. Private companies often hit a wall in their ability to raise capital and need more external funding to expand operations. The public capital markets provide great resources to companies in terms of financing—especially in large amounts.
Companies will often do follow-on offerings after an IPO as they need additional capital, or raise debt through the public bonds markets. These provide a wealth of resources that would otherwise be unavailable.
Does Your Company Have an Attractive Track record?
Companies who out-pace their industries and have high growth figures will have the most successful IPO’s. Remember, investors are looking for big returns and big growth trajectories from IPO’s since they are generally more risky, and won’t value your company very high if you have sub-par growth numbers. Investment bankers also want you to have a successful IPO to boost their own reputation. Consider what can be done before seriously considering an IPO to boost your growth.
Are You Prepared to File Documents with the SEC?
Public companies in the U.S. are required to file documents quarterly through a 10-Q and annually through a 10-K, as well as additional filings each time something big happens in the firm. These filings are very in-depth and require a good accounting staff. Make sure you are prepared to deal with these requirements and have the proper infrastructure in place. More particularly, you’ll need three years of audited financial statements.
Is Management Ready?
One of the top things investors look for is a good management team. A company is generally only as good as those who manage it. Investors look for management and boards who work well together and can take care of things under pressure. Public companies are watched very carefully and anything that happens within senior management will reflect trends throughout the company in the public’s view.
Is the Market Right?
Many economic factors play into an IPO and how successful it will be such as the general market strength, the market’s opinion of IPO’s, and your specific industry. The goal of an IPO is to get the highest price possible for your newly issued shares, so timing is critical. If you IPO in a down market, chances are that you will not be valued as high as you would in an up market. Since the stock market is so volatile, timing it correctly can be very difficult. The best-case scenario is that an IPO takes about 3 months from the first meetings, so you have to also time it in advance.
2014 was a particularly booming year for IPO’s as the market had been bullish for some time. Vivint Solar, the U.S.’s second largest solar provider and a Utah based company, IPO’d last October, raising $330 million. The timing was right and they had a very successful IPO. IPO’s have since slowed down amid dropping oil prices, and strong dollar, and poor Q1 economic growth numbers.
As this is simply an introductory guide to considering an IPO, much more thought and analysis should be included in your decision.