How To Take A Corporation Public
Going public is a huge endeavor. It’s not a step every company can (or should) take. While we tend to think of corporate giants as public companies—like WalMart, ExxonMobil and Lyft—there are plenty of powerful corporations that have opted to remain private, such as Mars, Albertsons and Enterprise. If your dream is to someday take your company public, it’s essential to understand the pros, cons, processes, and requirements.
What does it mean to go public?
As a private company, your investors are probably people you know—friends, family, and maybe a few angel investors. In a public company, however, shares are made available to the general public for sale. Publicly-traded companies are also subject to more restrictions (and much more oversight) than private companies.
How does a company go public?
Most businesses go public via an IPO—an initial public offering. An IPO is the first offer of shares to the public. In this situation, one or more investment banks typically agree to underwrite your shares. In other words, the investment banks assume the risk by buying shares from your company and selling them on the secondary market in exchange for a commission. The market is called a secondary market because everyday investors are buying the shares from an intermediary—not directly from your company.
It is possible to eliminate the middle man and have a direct public offering. This means the shares don’t undergo any underwriting and the business assumes more of the risk. Investors, however, can benefit from lower share prices since there are no underwriters or investment banks in the middle taking their cut of profit. Spotify, for instance, opted for a DPO in 2018.
There are other methods of going public as well, from spinoffs to Dutch auction IPOs, but the vast majority of businesses stick with a traditional IPO.
Why go public?
Going public requires a lot of time, money, paperwork and organization—is it worth it? A few key advantages to going public include the following:
- Capital: One of the most commonly cited reasons companies give for going public is the potential for raising capital. Some companies raise a few million dollars while others raise tens of millions or more. For instance, in September 2018, ticketing company Eventbrite raised $230 million and Chinese car company NIO raised over a billion dollars with their IPOs.
- Liquidity: After going public, shares are much more liquid thanks to easy access to public markets. Assuming there’s demand, it’s possible to issue more stock later on to raise additional capital. There’s also potential to offer stock options to employees.
- Reputation: While it’s hard to measure the prestige or brand awareness that going public may bring, the additional exposure can often benefit a public company.
Why stay private?
On the flip side, there are some significant drawbacks to going public. The application process is long and involved—it’s not uncommon for companies to begin preparations for an IPO several years in advance. The initial costs for valuations, legal teams, financial advisers and more can easily reach six figures. You also must have your books in pristine order—the US Securities and Exchange Commission requires three years of audited financial statements. The different stock exchanges each have their own minimum requirements for entry as well. You’ll generally need revenues in the millions of dollars (or better yet, in the tens of millions of dollars).
Time and money aren’t the only costs. Going public can mean losing a degree of control over your company as new shareholders gain voting rights. Your company will also be subject to increased visibility and scrutiny. The SEC requires disclosures about potentially sensitive information. There are numerous reporting requirements, including quarterly reports and annual audited financial statements.
If your IPO isn’t a smashing success right out the gate, it could even hurt your reputation. Just a few days ago, rideshare company Lyft had its IPO. When the stock price sank over 10% on the very next day, the drop generated a significant amount of negative press.
What are the basic steps of preparing an IPO?
Prepping your company for an IPO requires a substantial amount of work. Below is a general (and by no means exhaustive) overview of the steps a company will need to take:
- Get your internal workings in shape: Your management team needs to be strong and organized, and your finances should be meticulous. If no one in management or finance has experience running a public company, you might consider hiring someone with experience or seeking the assistance of coaches or advisers.
- Choose your lawyers: Yes, you’ll need legal help, preferably from a legal team that specializes in securities and has previously helped companies with the IPO process.
- Choose your investment banks: Some investment banks do underwriting, some focus on selling shares to the secondary market, and some investment banks do both. Some of the biggest names in the field include Morgan Stanley, Merrill Lynch and Goldman Sachs. You’re free to either choose a bank or invite banks to make bids. The banks will get a commission on their sale of shares, typically between 1 and 10%.
- Write an initial prospectus: A prospectus is a document that gives information about your business to investors to ensure they can make an informed decision. You won’t have the exact price or number of shares to be issued yet, but you’ll need other essential information about your company, including your plans for capital and any risks the business faces.
- Allow for due diligence: Your underwriters will need time to investigate and verify your financials and everything in your prospectus.
- File Form S-1: This is the form you submit to the SEC. The form includes your prospectus, audited financial statements and additional information. The SEC will likely respond with requests for further explanation and clarification, so there tends to be a period of back and forth. When the SEC approves your S-1, they issue you an effective date, which is when the shares will be available for public sale.
- Court investors: You’ll want to meet with as many institutional investors (investors that trade large numbers of securities) as possible before the effective date. This can mean holding dozens of meetings across the country in what’s commonly referred to as “the road show.”
- Determine price and number of shares to be sold: Your investment bankers will make a final recommendation for these key numbers. At this point, the final prospectus (with the price and share information added) can go to print.
Overall, if your ultimate goal for your business is to go public, the time to start preparations is now. From keeping books to hiring management, consider the effects each move you make now will ultimately have on your IPO. Going public is a long, slow road, but for some companies, the potential advantages are well worth the effort.