image of stocks on digital board on the street
The goal behind an IPO is to provide a self-sustaining funding model for a company by allowing public trading on the stock market. — Getty Images/Nikada

An IPO – or initial public offering – is usually the final stage in the funding life cycle of a company. While some companies opt to remain private even when they grow into massive corporations, many big-time startups and growing businesses decide to “go public” in order to create a sustainable company.

The purpose of an IPO

On a basic level, a public company is one that is publicly traded on stock markets. It can take decision-making power out of the hands of the few investors that owned the company when it was private, as now the company is technically publicly owned.

The purpose of an initial public offering is to provide a self-sustaining funding model for a company. It also allows initial investors to cash out on their investment. These two main purposes drive companies to leave the private sphere and instead tap into a new world of funding.

What is the IPO process?

Overall, the IPO process can be fairly complex. It’s important to break things down into several actionable steps. From a high-level perspective, these are the basic steps required to go public:

  • Select a bank.
  • Due diligence and filings.
  • Pricing.
  • Stabilization.
  • Transition.

Essentially, going public means partnering with an investment bank, researching your active market and regulatory requirements, and transitioning to a competitive public market. There is a tremendous amount of work that goes into each step, so make sure you select partners that can provide value to your organization.

[Read: Does Your Business Need Funding? Do These 5 Things First]

Before starting this process, it’s important to consider how being a publicly traded company will affect your organization and its identity.

Steps for going public

If you're thinking about taking your company public, here's an overview of what each step involves, according to Corporate Finance Institute:

Selecting a bank

The first step toward going public is selecting a bank to help with the transition and provide underwriting services. You'll want to prioritize the following factors when looking for a bank to partner with:

  • Reputation.
  • Quality of research.
  • Industry experience.
  • Distribution.
  • Prior relationships.

Due diligence and filings

Once you’ve selected a bank to work with, you need to iron out exactly what regulatory documents and information needs to be provided to the U.S. Securities and Exchange Commission (SEC). This is also where details between your company and the investment bank are ironed out. As an underwriter, the bank will facilitate the investment from the general public to your organization. There are several documents that need to be drafted and agreements that need to be reached, including an engagement letter, a best efforts agreement, letter of intent and registration statement.

Pricing

The underwriter and your company will work out an offer price the day before your company goes public on the stock exchange. This initial price is the amount each share will be initially sold on the market. Pricing is usually lower than expected in an effort to ensure that all of the company’s shares are purchased at the onset of the sale. As demand for shares grows, the trading price will increase.

Stabilization

Once the IPO occurs, the underwriter you partnered with will provide more advice and analyze your company’s shares on the market. From here, the organization can conduct stabilization methods to ensure that the trading of your company’s shares remains healthy and strong.

Transition to market competition

This is the final stage of an IPO, and it occurs after 25 days on the market. The first 25 days are a quiet period required by the SEC. After 25 days, company leaders can analyze share activity as reflective of market forces. This is also the point at which your underwriter and bank will move to a full adviser role.

Is an IPO right for you?

Before starting this process, it’s important to consider how being a publicly traded company will affect your organization and its identity. Make sure you’re headed down a path that’s best for you and your organization.

[Read: 3 Expert Strategies for Attracting Investors]

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

Published August 09, 2019