A successful company that’s generating significant and consistent revenue might begin to consider an initial public offering (IPO). An IPO is the process of going from a privately owned company to one that offers public shares to anyone who wishes to invest in the stock. While an IPO usually generates an inflow of cash, it has advantages and disadvantages that you need to know up front. How do you determine if your company is ready?
SIGNS OF IPO READINESS
There is no single sign that your company is IPO ready, but rather a cluster of them, according to Priyanka Prakash, a lending and credit expert at New York City based Fundera, a marketplace for small business financial solutions.
While there used to be what Prakash calls an arbitrary rule that a company had to generate at least $100 million in revenue before doing an IPO, she says that now the specific dollar amount is not necessarily a driver, so much as high revenue growth.
“You just have to show sustained revenue growth over the past several years and that you can continue to achieve that for the foreseeable future in order to give a return on investment (ROI) to your investors.
However, in some cases, such as the biotech industry, where there won’t be a product or revenue for many years to come, you can go public before you have any revenue to show, says Gregory Sichenzia, a New York City based securities lawyer specializing in IPOs and founding partner of Sichenzia, Roth Ference LLP. It’s a risky situation for both company and investors, but it does happen.
There are other “qualitative signs” that your company is IPO ready, Prakash says, such as having a good market share in your industry without a lot of competitors. She gives the example of Uber and Lyft, who are not in much jeopardy of being disrupted by a young upstart company.
Additionally, Prakash says, the company should have strong leadership. This includes a CEO or President, a CFO, and a PR or Marketing Lead as well as legal person. “These are signs to investors that you can and will perform well, but there are also a lot of legal and financial requirements that a public company has to meet.”
Your financial numbers should also be predictable, Prakash says. “When you’re private there isn’t a lot of scrutiny on your business, but when you go public there are analysts watching your company financials and they’ll have expectations for certain growth targets,” she says.
If you don’t hit those targets, your stock price could take a hit.
ADVANTAGES OF AN IPO
The main advantage of an IPO, Prakash says, is the influx of fresh cash—though there are alternate ways to do this such as business loans, private accredited investors and even mini IPOs where you don’t have to become truly public, but you do give out shares of you company to a select group of investors.
“In addition to more cash, another advantage is more brand visibility,” Prakash says. “Once you go public you become much more well known in your industry.”
Sichenzia says, “It offers you lots of liquidity by creating a new set of capital. Now you have stock you can buy things with.”
However, he also adds, “It’s very complicated with a lot of moving pieces.”
For one thing, the process of going public can be quite lengthy and costly up front, Sichenzia says. “You need to be audited. You need to choose accountants, law firms, bankers. Even pre IPO, entering into the process can take you twelve months,” he says.
Costs associated with filing your registration with the securities and exchange commission can run up to $500,000, and there are annual fees to maintain your listing, Prakesh explains.
“The other big con is that once you become public, there are a lot more legal and financial rules you have to follow under the SEC and that can be a full time job,” Prakesh says.
“You work now for the shareholders,” Sichenzia adds. “Your fiduciary responsibility is to them, and your best judgment has to be for them, not for you.”
Additionally, you give up the privilege of confidentiality once you go public, he says. “You have to be completely transparent as a public company. The public knows, to the penny, what every executive officer makes in salary, stocks and perks.”
A decision to go public will never be made by one person in a company, Sichenzia points out. “It’s a board decision.”
Fortunately it’s not a decision a company has to rush to make. “You can always go public in the future; it’s not like there’s a ticking time bomb that you have to do it in a certain time frame,” Prakash says.