Taking a company public is the sale of stock that allows the public to own equity in the company.The decision to take a company public involves more than the board of directors of a corporation.It requires a lot of paperwork to make the transition from private to public legal.Taking a company public involves taking on new responsibilities and has pros and cons.
Step 1: Hire a bank.
If you decide to go public, the first thing you need to do is hire an investment bank or syndicate.The investment bank looks at your financial performance.It helps you register your IPO with the SEC and determine a price for it.The investment bank buys all the shares on the day of the IPO.All of your shares will be purchased, and you won't be left undersold.The selling syndicate markets the shares to the public in exchange for a sales commission, while the underwrite syndicate is the investment bankers who guarantee the sale of the offering.Firms can act as syndicates.Investment banks are known for their large-scale, complicated financial transactions.Some of the most well-known investment banks are Bank of America, Merrill Lynch, Warburgs, Goldman Sachs,Deutsche Bank, JP Morgan, Morgan Stanley, Salomon Brothers, and Credit Suisse.
Step 2: Evaluate the offers from investment banks.
Three to five institutions should be invited to make bids.They will give a valuation of your company and how they think your stock will perform.Determine the accuracy and thoroughness of their research.The company will be evaluated by the bank.They may work with a syndicate of banks to share the risk if they don't want to bear all of it on their own.If you're looking for a bank that knows your industry, look for one that has brought other businesses in.If you meet certain financial criteria, an investment bank will want to work with you.They look for revenues of $10 to $20 million and profits of $1 million.For the next five to seven years, they want projected annual growth to be high.
Step 3: Establish a deal.
Discuss the amount of capital you want to raise.The bank will offer you a type of guarantee.A firm commitment means that they will raise a specific amount of capital by buying all of the shares and selling them to the public.A best effort agreement doesn't guarantee that all of the shares will be sold.When the market is unstable, this happens with high-risk securities.
Step 4: Understand how the bank makes money
The bank makes money when you sell your shares.Banks usually earn between 1 percent and 7 percent commission.They get to keep the difference between the price of the shares and the selling price.The fee is called the underwriting fee.The costs to print and distribute investment prospectuses may be charged by the syndicate.The commission is paid to the investment bank for taking all of the risk.When they purchase your shares, they are investing their own capital.If they can't sell the shares to the public, they will lose money on that investment.You can offer 300,000 shares for $20 per share.The investment bank will purchase all of your shares for a 5 percent commission.You made $6 million when the bank bought all 300,000 shares for $20 per share on the day of your IPO.The bank keeps 5 percent of the commission.The bank sells the shares for $25 per share.They make a profit of $5 per share.The total amount of money earned by the bank was almost $2 million.
Step 5: Due diligence is done.
All of the information that will be put into the registration document needs to be verified by the bankers, lawyers and accountants.To predict the company's financial performance, this includes researching the industry and market.Accountants look for any discrepancies in historical financial statements and tax records.Customers are contacted to learn more about their relationship with the company and how they view it compared to their competitors.
Step 6: The form S-1 is for the SEC.
It is the initial registration form that is required by the SEC for new companies who are going public.Before any shares can be sold to the public, the company must be approved for sale by the SEC.Required information includes how you plan to use capital you raise, information about your business model and your competition in the industry, a prospectus that details information investors should know, and disclosure of any potential conflicts of interest.
Step 7: You can arrange to sell some of your shares in the IPO.
If you or any of your private stock holders want to include any shares in the offering, this must be disclosed to the SEC in form S-1.This needs to be negotiated with the bank.The company would not get any of the proceeds from this sale.To avoid any hint of insider trading, specific requirements must be followed.Section 7 of form S-1 contains this information.The amount of securities owned prior to the offering must be disclosed, as well as the nature of any relationship or position the security holder has had with the company or any of its affiliates within the last three years.A lock-up period is imposed by many investment banks.Private stock in the company can't be sold for 90 to 180 days after the IPO.To avoid depressing the value of the stock, the purpose is to flood the market with shares.Any shares that are sold into the general market must be registered or private sale to someone who will be restricted by the same non-pubic sale rules.The company does not benefit from the sale of shares by insiders.
Step 8: Wait for a response.
The SEC imposes a cooling off period after receiving the registration document.The information provided in the registration documents is checked by the SEC.The SEC issues an effective date when the information has been verified.The public will be offered the stock on this date.
Step 9: Make a red herring.
The brief prospectus details your company's business operations and projected financial performance.The number of shares you will be offering and the expected price of your shares are not included.It is used to communicate.It gives them the information they need to make a decision about buying shares in your company from the investment bank on the day of the IPO.
Step 10: Prospective institutional investors are interested in meeting with you.
Companies that trade securities in large quantities receive preferential treatment from institutional investors.Institutional investors include pension funds and life insurance companies.In order to get institutional investors to invest in your company, you will have to travel around the country.The dog and pony show is known as the road show.
Step 11: Accept requests for subscriptions.
The investors will subscribe to the offering if the pitch is successful.They will purchase a certain number of shares from the bank on the day of the IPO.The exact price of the shares is not known, so the commitment is non-binding.The investors are free to back out if they so choose.The number of shares that can be purchased on the offering is usually limited by the Underwriters.It is not in the best interest of the company to have a few dominant shareholders.
Step 12: The IPO price should be negotiated.
Set an initial selling price for your shares with your broker.The price will be affected by the nature of your company, the success of the road show, and the current market conditions.The price is determined by quantitative and qualitative factors.Demand, industry comparables and growth projections are some of the quantitative elements that affect price.Strong demand for your company's product may lead to a higher IPO price, protecting the offering price or causing it to go higher.Industry comparables, or the IPO price of other companies in the same industry, also factor into the price.The valuation of your IPO will be impacted by your future growth projections.A product that will change the way things are done is a qualitative factor.
Step 13: Choose a stock exchange.
The New York Stock Exchange will make bids for your business.Your business could lead to increased trading with other IPO's.The exchange wants the prestige of being associated with you if your company is well-known.There will be pitches from the different stock exchanges.There are requirements for each exchange.The majority of companies begin on the NASDAQ and go on to the New York Stock Exchange.Many companies have their stock traded on multiple exchanges.
Step 14: Get money from investors.
The bank will purchase all of the shares on the day of your IPO.They will try to sell them to the public.The most favored customers of firms in the selling syndicate will be the ones who will get in on the IPO.The average investor won't be able to buy your stock until later.The value of your company's stock will be higher than the initial offering price if the investment bank does a good job of promoting the sale.Don't be concerned if the price of your stock does not go up on your IPO.The most profitable companies start out slow but build value over time.The after-market for the shares is ensured by the setting of the offering price.The company doesn't receive any proceeds for shares that are above or below the offering price.If you include your privately-held shares in the offering, the proceeds will go to you, not the company.If the SEC approves the sale and the deal is disclosed in the S-1 form, it will happen.
Step 15: Financial communication processes should be created.
Most of the financial communication takes place in the months and weeks leading up to the IPO.Once the IPO is over, the bank moves on and you are left to communicate financial information to a new set of stakeholders, like analysts, investors and employee-owners.A plan to publicly communicate company information is needed prior to the IPO.A reporting cycle is defined when financial reports will be published.The SEC requires public companies to report financial data regularly.Communication with the public and potential investors is limited by law.Press releases can be used to promote key events, product development schedules and conference attendance.A positive relationship can be formed by good communication with shareholders.Conflict resolution and future communication will be helped by this.
Step 16: Before your IPO, build relationships with the institutional investors.
Two years ahead of your IPO, you should be fostering these relationships.You can choose the best investment bank for your deal if you know it.Potential investors will likely commit to the purchase of shares during your road show if you allow them to become familiar with your company.Get to know analysts who cover your industry.Have them write reports about your company when you meet with them regularly.Analysts can't publish reports to the public until after the stock has traded for a certain period.You should meet the bankers at their firms once you have a relationship with the analysts.Attend conferences to get to know institutional investors.
Step 17: It's important to keep your financial projections realistic.
If you get caught up in the excitement of the IPO, you will create financial projections that you can't meet.Have your financial projections reviewed by a neutral third party after you perform a stress test on them.Your credibility is protected by providing realistic financial projections.You run the risk of losing the trust of your investors if you miss your expectations for two or more quarters.
Step 18: Take the impact of the IPO into account in your projections.
The IPO will affect your financial statements.When preparing financial projections, include these impacts.The IPO will increase public company costs and non-cash, share-based compensation.The change in shares outstanding is taken into account.Consider how you will use the IPO proceeds.If you are repaying debt, factor in any discounts and account for the impact to interest expense.
Step 19: Give enough time for road show presentations.
You should have enough time to prepare and rehearse your presentations.Work around the schedule of the institutional investors.Conferences and IPO meetings can make them unavailable on certain dates.You should take at least one week for each presentation.Allow time for traveling and for adjusting times.