Going public refers to a private company's initial public offering (IPO), moving to a publicly traded and owned entity. Businesses usually go public to raise capital in hopes of expanding.Additionally, venture capitalists may use IPOs as an exit strategyto reap their investment in a company they've invested in.
Key Takeaways
- Going public refers to a private company's initial public offering (IPO) and moving 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, impose restrictions on management, and open the company to regulatory constraints.
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 the 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.
Once a privately held company is ready to go public or spinoff a portion of its business into a new public entity, the formal process typically takes six months. The process involves investment bankers, attorneys, and accountants, who work with management to navigate the IPO.
154
The number of U.S. companies that went public in 2023.
Requirements for Listing
Underwriters commonly require that companies meet the following requirements before going public:
- The company has predictable and consistent revenue, and thebusiness 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 businesssector.
- The company should be a top player in the industry.
- A strong management team is in place.
- Audited financialsare a requirement for public companies.
- Strong business processes are in place.
- Thedebt-to-equity ratioshould be low. This ratio can be a factor in derailing a successful IPO.
- The company has a long-termbusiness planwith financials spelled out for the following threeto fiveyears.
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?
When a company goes public, it often creates pressure for short-term growth, 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. To help ensure success, a private company should have factors in place before going public, such as a business model with sustainable growth potential and a strong management team.
FAQs
In an IPO, a privately owned company lists its shares on a stock exchange, making them available for purchase by the general public. Many people think of IPOs as big money-making opportunities—high-profile companies grab headlines with huge share price gains when they go public.
How does going public work? ›
Going public typically refers to when a company undertakes its initial public offering, or IPO, by selling shares of stock to the public, usually to raise additional capital. Going public is a significant step for any company and you should consider the reasons companies decide to go public.
What is an example of going public? ›
This strategy has been dubbed going public. Example: At the end of 2002 and the beginning of 2003, President George W. Bush and his aides decided to “go public.” Bush made many speeches in support of going to war in Iraq, and he convinced many, many people to support the war.
What are the requirements to go public? ›
Requirements for Going Public
- Board Approval. Going public starts with a proposal to the company's board of directors by the management of the company. ...
- Assemble Team. ...
- Review and Restate Financials. ...
- Letter of Intent With Investment Bank. ...
- Draft Prospectus. ...
- Due Diligence. ...
- Preliminary Prospectus. ...
- Syndication.
Going public refers to a private company's initial public offering (IPO), moving to a publicly traded and owned entity. Businesses usually go public to raise capital in hopes of expanding. Additionally, venture capitalists may use IPOs as an exit strategy to reap their investment in a company they've invested in.
How much money do you need to go public? ›
Optimal Company Revenue and Financial Levels for an IPO
Larger companies may wait until they generate $100 million to $250 million or even $500 million in revenue before going public. With the JOBS Act, an IPO revenue level can be lower than $50 million, as can a company's total assets.
Can you go private after going public? ›
There are several ways public companies can go private. With a management buyout (MBO), existing management pools its resources to purchase all or a majority of the public company's shares.
What is the minimum revenue to go public? ›
Conventional wisdom tells startups to go public when revenue hits $100 million. But the benchmark shouldn't have anything to do with revenue — it should be all about growth potential. “The time to go public could be at $50 million or $250 million,” says Solomon.
Is it a good idea to go public? ›
Maintaining Corporate Identity and Becoming Better Known
Public companies are more transparent than private companies because they need to disclose information, including financial statement results, publicly.
What are the three ways to go public? ›
In the United States, private companies have several options to go public, including traditional IPOs, direct listings, and special purpose acquisition companies (SPACs). The traditional IPO is the most common method for taking a private company public.
Overall Cost: The overall cost of an IPO can range from $2.5 million to $10 million, depending on the size and complexity of the offering. This does not include ongoing costs of being a public company, such as legal and accounting fees, investor relations, and compliance costs.
Can you make money using public? ›
On Public, you can invest in shares of royalties and potentially earn passive income from an asset class that typically performs independently from traditional markets.
What does it mean that LLC can't go public? ›
Limited liability companies can't go public as they do not issue stock or have shareholders. Security exchanges like the New York Stock Exchange or the National Association of Securities Dealers (NASDAQ) have listing standards for all participating companies.
How does going public make money? ›
Companies can raise additional capital by selling shares to the public. The proceeds may be used to expand the business, fund research and development or pay off debt. Other avenues for raising capital, via venture capitalists, private investors or bank loans, may be too expensive.
Why not to go public? ›
One of the biggest factors that puts companies off going public is the need for added disclosure for investors. When companies go public, they are required to regularly keep the public updated about their activities and financial performance and do so in a certain way.
What is one benefit of going public? ›
Going public is popular because the advantages of an initial public offering often outweigh any challenges or downsides. These benefits include capital, visibility, investor opportunities, a new kind of business currency, and the enhancement of the company's governing structure.
Do companies get money from going public? ›
Companies will raise substantial amounts of capital through an IPO and subsequent funding rounds to fund general corporate operations, growth opportunities, R&D, marketing, capital expenditures.
How much does it cost to go public? ›
Overall Cost: The overall cost of an IPO can range from $2.5 million to $10 million, depending on the size and complexity of the offering. This does not include ongoing costs of being a public company, such as legal and accounting fees, investor relations, and compliance costs.
How does public participation work? ›
Public participation can be any process that directly engages the public in decision-making and gives full consideration to public input in making that decision. Public participation is a process, not a single event.
