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The term “going public” refers to a private company’s initial public offering (IPO) when it moves to a publicly traded and owned entity. Businesses usually go public to raise capital in hopes of expanding. Venture capitalists may also use IPOs as an exit strategy to reap their investment in a company they’ve invested in.
Key Takeaways
- Going public refers to a private company’s initial public offering (IPO) when it moves to a publicly traded and owned entity.
- Going public helps a company raise capital to invest in future operations, expansion, or acquisitions.
- The process may diversify ownership.
- It can also impose restrictions on management and open the company to regulatory constraints.
The IPO Process
The IPO process begins with an investment bank to determine the number and price of company shares that will be issued. Investment banks complete this underwriting, becoming owners of the shares and assuming legal responsibility for them. The goal of the underwriter is to sell the shares to the public for more than what was paid to the original owners of the company.
The formal process typically takes six months when a privately-held company is ready to go public or spin a portion of its business into a new public entity. The process involves investment bankers, attorneys, and accountants who work with management to navigate the IPO.
Important
225 U.S. companies went public in 2024. This was a 46% increase from 154 in 2023.
Requirements for Listing
Underwriters commonly require that companies meet the following requirements before going public:
- The company has predictable and consistent revenue.
- The business is mature enough to predict the next quarter and the following year’s expected earnings.
- There is extra cash to fund the IPO process.
- There is growth potential in the business sector.
- The company should be a top player in the industry.
- A strong management team is in place.
- Strong business processes are in place.
- The debt-to-equity ratio should be low. This ratio can be a factor in derailing a successful IPO.
- The company has a long-term business plan with financials spelled out for the following three to five years.
Audited financials are an additional requirement for public companies.
What Are the Advantages of Going Public?
A company that decides to go public commonly strengthens its capital base, makes acquisitions easier, diversifies ownership, and increases prestige.
What Are the Disadvantages of Going Public?
Going public often creates pressure for short-term growth. It increases costs, imposes more restrictions on management and trading, forces disclosure to the public, and often strips former business owners of control.
What Types of Companies Underwrite IPOs?
Some of the largest IPOs in the United States have relied on companies such as Morgan Stanley, Credit Suisse, and JP Morgan.
The Bottom Line
The timing of an IPO is crucial to avoid periods where the markets are unfavorable. A private company should have factors in place before going public to help ensure success such as a business model with sustainable growth potential and a strong management team.
