An initial public offering (IPO) by definition is the process by which a previously private company makes its shares available to investors. An IPO can be an exciting opportunity because it's one way to obtain new capital that can help your company grow and succeed. Despite the lure of such an infusion of cash, an IPO isn't always right for everyone. Discover if and when the time is right for you and your business to "go public."
Why Choose an IPO?
Companies that are growing and whose success depends on investment stand to gain the most from an IPO. It might seem like every small business would meet these criteria, but that's not necessarily so. There are many small businesses whose growth doesn't depend on having publicly traded shares - they might serve only a specific city, sell products or services with limited national appeal or be in an industry with few competitive peers. If your business falls into any of these categories, an IPO may not be to your advantage. You'd be better served accessing local capital from, for example, banks or interested private investors.
You might think your small business has considerable growth potential. Maybe you've created a very strong retail brand with customers all over the country, or developed a new kind of software or you're confident your business can only expand if it has more resources. If you see such growth possibilities and have tapped out local sources of credit and investment, your business is ripe for an IPO.
How Does an IPO Work?
Filing for an IPO, a process governed by the US Securities and Exchange Commission, requires you to provide a great deal of information about your business. You'll need not only audited records but also a detailed description of your business. Since you're writing for investors who can sue you if you mislead them - for example, by being too optimistic about your company's prospects for success - you'll need legal advice.
Advice is the key to any IPO filing because, in addition to legal help, you'll need an investment bank to underwrite the offering. Prominent underwriters include Merrill Lynch, Goldman Sachs, Bear Sterns, Credit Suisse, Citigroup, Morgan Stanley and UBS Securities. Unfortunately, there's no shortcut to figuring out which underwriter to approach. A good place to begin is to read a recent books about IPOs to obtain a detailed understanding of how investment banks shepherd you through the IPO process. Also, leverage your connections. Find people who know about the process from personal experience and ask them questions.
Deciding to go public might be the most momentous decision your business ever makes; accordingly, learn as much as you can about the process, and consider that regulations such as the Sarbanes-Oxley Act demand a great deal from a public company. Doing your homework diligently will improve your chances of making a smooth transition from small company to SEC-compliant enterprise.