An initial public offering of stock can be viewed as the definitive sign of a company's success. Here is a look at the steps a company can take to prepare for an IPO.
For many growing companies, "going public" is more than just selling stock. It's a signal to the world that the business has made it.
That's why undertaking an initial public offering (commonly known as an IPO) -- the first sale of stock to the public by a private company -- has long been the ultimate goal for many an entrepreneurial business. An IPO can not only provide a company with access to capital to fuel growth and liquidity for founders and investors, but it provides the public market's unofficial stamp of approval.
Yet recent regulatory changes, such as the 2002 Sarbanes-Oxley Act (SOX), have given new meaning to the term IPO. It's not just a public offering of stock, but it can also be an intensely arduous and increasingly expensive ordeal. In order to gain the benefits of raising capital and achieving greater liquidity that an IPO offers, companies must be more solidly established and better able to pass tougher regulatory requirements than in the past. Doing so comes with a bigger price-tag than ever before. These days, companies going public should expect to pay more than $2 million in out of pocket expenses to cover a host of fees – among them legal, accounting, printing, listing, filing -- in addition to the underwriter discount and commission of 7 percent of the offering proceeds and to shore up internal processes to meet the tougher reporting and governance standards for public companies.
The following pages will detail the pros and cons of going public, the qualifications a business needs to go public, and the steps involved in the IPO process.
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Taking a Company Public: Why You Should Consider It
An IPO is one of the most sign
ificant events in the life of a business. The capital raised through a successful public offering boosts a business' ability to expand into new market
s or grow through acquisitions. It can help a company attract new talent with stock options and other equity awards and reward initial investors with liquidity. "There is also the prestige factor," says James S. Rowe, a securities partner with Kirkland & Ellis LLP, a 1,500-lawyer firm that has counseled countless companies through the IPO process. "The fact that you're a public company gets you in the door with vendors and suppliers and prospective business partners. Being a publicly traded company has additional cache and is something that can be helpful to a company in its commercial relationships."
Such benefits, however, don't come without costs. One important intangible cost to consider is the loss of control over the business when a formerly private company goes public. The following is a list of pros and cons to consider in determining whether to take a company public.
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Taking a Company Public: The Benefits of Going Public
• Given the higher valuation of a public company and the greater liquidity in the public markets, there is greater access to capital, Rowe says. In fact, while the first public offering may be costly and time consuming, if there is market demand for the stock a company can always issue more stock -- which can be conducted more quickly and efficiently as a seasoned issuer.
• The increased liquidity can help a company attract top talent by enabling it to grant stock options or restricted stock awards.
• A public offering provides a business with the currency with which to acquire other businesses and a valuation if your business becomes an acquisition target, Evans says.
• An IPO serves "as a way for founders or em
ployees or other share or option holders to get liquid on their investment, to see a financial reward for the hard work that has gone into building the business," Evans says.
• The act of going public can also serve as a marketing event for a company, to drum up interest in the business and its products or services.
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Taking a Company Public: The Downside of Going Public
• The biggest downside to going public is often the loss of control over the company for management and founders/investors. Once a company is public, managers will be under often intense pressure to meet quarterly earnings estimates of research analysts, which can make it much more difficult to manage the business for long-term growth and predictability.
• The SEC requires public companies to reveal sometimes sensitive information when they go public and on an ongoing basis in required filings. Such information may include data about products, customers, customer contracts, or management that a private company would not have to reveal.
• Public companies have additional reporting and procedural obligations since the passage of the Sarbanes-Oxley Act, many of which may be costly for a company to implement, such as the Section 404 requirements relating to internal controls over financial reporting, says Bruce Evans, managing director at Summit Partners, a Boston-based private equity and venture capital firm.
• In a worst-case scenario, a group of dissident investors could potentially obtain majority control and wrangle control of the company away from the board.
• If a stock performs poorly after a company goes public, an IPO can generate negative publicity or "an anti-marketing event" for the company, Evans says.
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