by Lauren Dever
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More companies went public in 2020 than any other year so far in the 21st century. From Roblox, to The Honest Company, to Poshmark, and Coinbase, the buzz behind going public continues as we move deeper into 2021.
Driving the increased turn from private to public are a few business trends and market factors such as pandemic shifts, more avenues to going public (looking at you SPACs), and tech companies receiving higher valuations. All the buzz makes going public sound glamorous and exciting, but it is also a complicated process that must be adequately prepared for. With this in mind, below we review some basics of IPOs, as well as advice for how companies should prepare to initiate one.
What is an IPO?
IPO, or initial public offering, is a form of equity financing. Specifically, the founders or owners of the company give up a percentage of ownership for capital (cash). Of course, there are additional benefits beyond increased capital to going public, but it is critical to understand this shift from a private company to a public company requires a great deal of organization and preparation. In fact, PWC notes the most successful IPOs are fully prepared for by learning how to act as public companies prior to launching IPOs.
An IPO roadmap generally entails the following stages: the decision to go public, due diligence, filings, pricing, stabilization and transition to market competition.
What Are The Benefits of an IPO?
Going public brings with it a variety of challenges; however, the most widely occurring benefits of going public include:
- Notoriety — Media outlets report on IPOs, and the general population of consumers usually see public companies as credible due to the intense IPO process. The company’s reach and exposure to new clients also increases.
- Raising capital — Raising capital becomes easier and given the advantages noted above, public companies enjoy low insurance rates on loans. Many see an IPO as the best way to raise capital.
- Exit strategy for founders and shareholders — Going public allows founders and other shareholders to exit a business with cash or secure cash for future expansion. Additionally, stock options are often also appealing to employees and can help with both employee retention and attracting new talent.
How Should Companies Prepare for an IPO?
Based on the premise that preparation and timing are key, we offer the following best practices for preparing for an IPO:
- Assess your company’s ability to go public and understand how to function as a public company.
Because a public company is scrutinized much more than a private company, before going public you must analyze all areas of the company and determine any existing and/or potential business gaps; in addition, understanding how quickly you can pivot is critical to establishing a strong public company. For instance, do you have vigorous codes of conduct and processes in place like public companies do? Do you understand how to accurately forecast results and finances? Is your team ready? Are your finances in order? How will you communicate with those outside of your company during the IPO process? Do you understand what can and cannot be shared? Do you have robust communication strategies in place? Consider your web presence: is all information accurately and clearly displayed? Going public will require heightened transparency and input from stockholders, both of which many private companies are not ready for.
- Compile your team.
As with most business ventures (mergers, acquisitions, divestitures…), the partners you select, and this includes the providers of business tools, are of the utmost importance. Generally, when preparing for an IPO, you will want to onboard attorneys and financial advisors. Financial advisors or an investment bank will perform valuation of your company, which can be quite tricky, but is essentially based on assets and revenue. Underwriters will also be essential in performing due diligence and closing the deal. Experience matters when it comes to compiling your IPO team.
- Prepare for due diligence.
Being proactive and gathering, or at least anticipating, the documents required for due diligence will save time. Moreover, leveraging a tool, namely a secure digital resource that will provide one source of truth throughout the process, is especially useful during IPO due diligence.
- Understand common roadblocks.
Failure to plan what life will be like as a public company is one of the most common pitfalls of IPO planning. Another is “gun jumping”, meaning communication that violates the Securities Act. This mistake can have devastating effects on your company’s IPO timing, credibility, and overall value. Finally, being unprepared to provide investors and the public with the required information on a regular basis will negatively affect the perception of a new public company.
Preparation, organization, robust analysis of cost, and identifying IPO pros and cons are vital business elements when preparing for an IPO. With this in mind, IPO planning is often much more stressful and taxing for smaller companies, and therefore, may not always be the best business growth strategy. If it is right for your company, then anchor yourself to the big picture, secure expert support, and leverage a streamlined tool.