IPO Process: 7 Step Guide for Taking Your Company Public

IPO Process: 7 Step Guide for Taking Your Company Public

(Last Updated On: April 7, 2019)

Your business dream became a reality when you founded your own company. It’s been a bumpy ride, but you’ve managed to get the ship moving in the right direction at a steady pace. What comes next?

 

Perhaps, as the company grows and evolves, you’ll want to see it reach its fullest potential. But what does that really mean? It means raising more funds so the business can reach new heights. It also means opening the decision-making process up to more creative minds.

 

Or, perhaps you’ve gotten all that you want from your senior position in the company, and you want to reduce your responsibilities (or even exit the business completely).

 

These are just a couple of reasons why someone would consider taking a company public. Here, we’ll journey into the world of initial public offerings to answer the most fundamental questions involved: How to take a company public. When to take a company public. Why to take a company public.

 

What is the IPO Process?

 

Before you can determine your ‘IPO readiness’, you’ve got to have a firmer understanding of what taking a company public really is. The initial public offering process, or IPO process, is the first sale of stocks or shares that are made available by a company for purchase by the public. Of course, before going public a company is private and is controlled by founders and investors.

 

While the amount of time it takes to complete the IPO process varies from company to company, the minimum amount of time that it takes to fill the proper paperwork and complete the necessary steps is roughly 6 months. More on the specific steps to taking a company public below.

 

How much does it cost to take a company public?

The total cost of taking a company public is roughly 10.5% of its gross proceeds. In other words, if the total gross proceeds of your company are $100 million, you should plan to spend between $10.5 million to $11 million to take your company public. Again, it’s important to remember that the answer will differ from one enterprise to the next when considering the fixed and variable expenses. If financing is a concern, see how Lending Express can help you meet your expenses quickly and easily.

 

It goes without saying that the initial public offering process is not cheap, quick, or particularly simple. But – with the risk of sounding cliché – nothing worthwhile in life comes easily. Which begs the question: what are the advantages of taking a company public?

 

We’ll provide the full list of pros and cons further below, but in general, the goal of the IPO process is to increase the company’s profitability. This can be the direct result of having a larger pool of investors, or the secondary effect of amplifying the company’s exposure in the market. However it happens, going public with your company is one of the best ways to improve sales and profits.

 

With all of this information at hand, the next step is to explain how to take a company public…

 

An overview of the IPO process

 

With a minimum 6-month process ahead of companies planning to go public, it may seem like there’s no time crunch. Plenty of time, right?

 

Wrong!

 

Just because the minimum is half a year doesn’t mean you’ll want it to take longer. Get your ducks in a row so that you can zoom through the IPO process and keep the company moving forward.

 

You can start with this step-by-step guide to taking a company public.

 

7 steps to the IPO process:

  1. Hire a team of underwriters
  2. Develop the company prospectus
  3. File the company prospectus for official review
  4. Define the number and price of shares
  5. Set a date for the offering
  6. Stabilization
  7. Transition to market competition

 

Get a deeper look at each of the 7 steps to taking a company public, below:

 

Taking a company public

 

1. Hire a team of underwriters

The initial step in the IPO process is to decide on an investment bank that will guide the issuing company. The bank will also provide the company with a team of underwriters, comprised of lawyers, certified public accountants, public relations experts, and SEC (Securities & Exchange Commission) professionals. The underwriting team’s job is to make sure that the IPO is successfully completed and that the stocks are sold at the appropriate price. Investment banks typically charge between 3 and 7 percent of the IPO’s total sales price for the underwriting and advisory services.

 

2. Due diligence and regulatory filings

The second step in the IPO process is for the underwriting team to begin doing its job. Generally speaking, this takes place around 3 months prior to the IPO. This entails multiple forms and documents that need to be filled accurately, which will subsequently be reviewed by the SEC for approval.

 

The forms to be filled by the underwriting team include:

  • Engagement letter
  • Letter of intent
  • Underwriting agreement
  • S-1 Registration statement
  • Red herring document

 

3. File the company prospectus for official review

After all of the paperwork has been completed, the company prospectus – a report of the company’s financial history and projected growth – is filed to the SEC. Upon filing the company prospectus, an investigation conducted by the SEC begins in order to confirm that there aren’t any reasons for the issuing company to be rejected. After all, if unstable or problematic companies were allowed to participate in the stock market, it would spell trouble for investors and the economy as a whole. Standards exist and are enforced in order to maintain a stable marketplace.

 

4. Set a date for the offering

This step towards taking a company public is pretty self-explanatory. The issuing company and the underwriting team collaborate to pick a date to initiate the IPO. There isn’t any special technique of picking the ‘right’ date. Ultimately, the date that is chosen is going to depend on all of the paperwork being filled and completed. From there, the specific date is chosen more or less arbitrarily.

 

5. Define the number and price of shares

Step number five in the IPO process is subject to many more variables and requires more careful thought than the earlier steps. There’s no magical equation that underwriters use to determine the appropriate number or price of shares on the day of the IPO. The essential goal is for the investment bank (underwriters) to offer a high enough price that the issuing company will raise a satisfactory amount of money while simultaneously being a low enough price that individual investors will be encouraged to purchase shares.

 

Factors that affect price:

  • The issuing company’s target price
  • The reality of the market
  • Projected demand for shares

 

6. Stabilization

Stabilization is a crucial step in the IPO process because it gives the underwriters an opportunity – immediately following the introduction to market – to balance any potential order imbalances. In plain English, stabilization is the process of underwriters purchasing shares in an effort to – you guessed it – stabilize the market price.

 

Think basic supply and demand. If there are a ton of shares that nobody is buying, the prices will drop. In order to keep the price stable, underwriters will purchase those ‘leftover’ shares and make it appear to individual investors that the demand is up.

 

7. Transition to market competition

The final step of taking a company public is to calibrate the share prices to the state of the market. This transition begins 25 days after the IPO, following what is known as the “quiet period” (the “quiet period” is mandated by the SEC).

 

During the quiet period, shareholders rely on the company prospectus and very little other information to evaluate the shares’ value. During the transition to market competition, shareholders begin evaluating the company’s valuation based on the interaction between the company and the market.

 

Imagine playing the first round of a poker game with your cards close to your chest, then playing the next rounds with the cards clear for everyone to view. The quiet period is the first round, and the next rounds are the transition to market competition.

 

When should you take your company public?

 

No two companies or industries for that matter, are identical. That means no two will go about complex processes – such as scaling up a business or taking a company public – the exact same way. Indeed, a company’s IPO readiness may depend as much on the “why” as it does on the “when”. This is less a problem of how to take a company public correctly, and more so an issue of how to take a company public wisely.

 

Overall the chances of undertaking the IPO process successfully are higher when the company is already operating healthily. If the business is shaky and has had a rough year, it’s probably not the time to toss it into the deep-end to see if it can swim.

 

You may want to consider taking a business loan to get your finances back on track before you go public. One option worth taking into account is an unsecured business loan, which requires no collateral in order to qualify.

 

On the other hand, if the business is thriving and there are indications of the market doing well, the time may be right to go public.

 

As far as the “why” goes, some companies may go public because they can’t raise any more funds from private investors, some may want to gain more exposure to the public, and still, others may want to offer more flexible terms for individual investors. The reasons will vary greatly, but the constant truth is that the reason has got to be strong enough to keep the motivation levels high throughout the IPO process.

 

What are the pros and cons of taking your business public?

 

Going public with your company has its ups and downs. Take a peek at the infographic below to get a better idea of the advantages and disadvantages of the initial public offering process.

 

Pros & Cons - Taking a company public

 

Alternative share offering strategies

 

Here are a couple of alternative strategies to taking a company public:

 

Reverse merger

Also known as a reverse takeover or a reverse IPO, a reverse merger is the process of a private company taking control of (and merging with) a dormant public company. Since the public company is basically inactive, it is referred to as a “shell company”. Shell companies are useful because they have already gone through the IPO process, which is music to the ears of private companies looking to go public.

 

A reverse merger, when compared to the normal IPO process, is not only much more affordable but also takes a significantly shorter period of time to complete. Reverse mergers can take anywhere from a few weeks up to three or four months, while IPOs take at least 6 months to complete.

The benefit: There’s also the benefit of the private company’s founders being able to retain a larger percentage of ownership – even after taking the company public.

 

Direct listing

This second alternative to taking a company public is best suited for smaller companies that don’t have the financial ability to pursue the traditional IPO process. The direct listing process (DLP), also called direct placement or direct public offering (DPO), is as the name suggests: a process whereby the company “sell shares directly to the public without the help of any intermediaries.”

 

While it is considered a more egalitarian way of offering shares to the public and is certainly much less expensive of a route to choose than an IPO, the costs of direct listing come in a different form. Since there are no underwriters involved in the process, there’s no support and no guarantee that the shares will sell, which presents a real risk to the company’s stability. There is a myriad of other disadvantages of choosing a DLP, but the option remains available because many startup companies can truly make good use of it.

 

The last word

 

The initial public offering process is a bit complex, costs a pretty penny, and will take time to complete. But, despite the investments that are made and the expenses that need to be covered throughout the IPO process, there are great benefits to taking a company public.

 

Don’t allow a challenge to keep you from taking your company to the next level. Nothing ventured, nothing gained. You’ll need to take a risk if you want to reap the rewards. But, of course, you have to go about it wisely.

 

As a recap, we’ve answered the questions:

  • What is the IPO process?
  • How much does it cost to take a company public?
  • What are the steps to taking a company public?
  • When should you undertake the initial public offering process?
  • Why should you undertake the IPO process?
  • What are the pros and cons of IPOs?
  • What are the alternatives to IPOs?

 

So be sure to re-read this article, share it with colleagues who can use this information, and bookmark it so you can revisit in the future. Also, if you feel there were any questions that were left unanswered, leave us a comment below and let us know!

Disclaimer: The information contained in this article is provided for informational purposes only, should not be construed as legal advice on any subject matter and should not be relied upon as such. The author accepts no responsibility for any consequences whatsoever arising from the use of such information.