For many business owners, going public represents the ultimate end game for their companies: a chance to cash in on all their hard work in building their businesses. For others it’s a way to raise much-needed capital to fuel continued growth. But what exactly is “going public”? And is it the right strategy for you and your business?
High Risk, High Reward
Also referred to as an initial public offering, or IPO, going public is the selling of ownership shares or common stock to the general public. The shares of public companies are traded on stock exchanges such as the New York Stock Exchange and the NASDAQ.
Owners can reap huge financial rewards upon going public if the IPO is successful, or they can use an IPO to raise vast sums of cash to fund growth. IPO funds can be used to finance the expansion of manufacturing or service capacity or marketing activities that may help boost earnings significantly as well as to fund research and development and other activities. Other benefits of going public include the following:
- Direct access to capital markets, through which your business can raise additional cash via a secondary offering
- The ability to hire and retain better employees and executives by offering them stock grants and stock options
- Higher prestige in the eyes of your industry, competitors, and customers
- An exit route for selling your shares when you’re ready to leave the business or retire
- A potentially higher business valuation
These benefits come at a price, however. Public offerings are an expensive way to raise funds, at least in the short term. You’ll immediately give up a large chunk of equity in your company, typically a minimum of 25 percent, and pay up to another 25 percent in fees and expenses.
You’ll also sacrifice much of your autonomy because you’ll be responsible to and have to answer to public shareholders and a board of directors. Ongoing communication with the investment community, aka “the Street,” will be critical; this includes institutional investors, brokerage firms, the financial press, and, of course, your shareholders. In short, you must meet the expectations of an entirely new set of stakeholders.
What It Takes
The best IPO candidates are startup and established companies that can demonstrate the potential to develop into highly profitable enterprises that can grow sales and earnings significantly, usually at least 20 percent per year. Ultimately a public company should be able to achieve a market valuation (defined as total shares outstanding, multiplied by the share price) of at least $100 million. Other attributes the investment community looks for in companies it considers taking public include the following:
- A predictable earnings stream: Future earnings should be steady and consistent. Wall Street hates surprises.
- An experienced management team: This is one of the key factors underwriters and investment bankers look at. They want to see executives and partners who are experienced in your industry. If they have worked at other public companies or have gone through IPOs before, so much the better.
- A strong unique selling proposition: Investors want to know two things: 1) What other companies are similar to yours and 2) how are you different from them? The first helps them better understand your business, market, and potential opportunities, while the second tells them how you will compete with others, and win.
- A hot industry: Is your industry currently surfing the crest of public popularity? The dot-com boom of the late ’90s included many companies that went public and eventually flamed out. But some of the ones that survived, such as Amazon.com, Yahoo, and eBay, remain among the largest and most influential online businesses today.
Don Sadler is a freelance writer and editor specializing in business and finance.