Initial Public Offering

What to do beforehand

By Vinayak Gole

A small business is usually an enterprise with a number of employees ranging from 50 to 250. A typical example of a small business would be the neighborhood bakery or the restaurant at the end of the street.

IPO stands for Initial Public Offering. It is a company’s first sale of stock to the public. An IPO is often called "going public” - a company usually goes for an IPO when it is sure it is growing and has need for a large amount of cash.

Whereas going for an IPO could be a good way of accumulating cash, the downside could be the cost associated with an IPO both financially and with respect to cost and effort. Listed below are some of the facts a pre-IPO company should consider before going public:

  1. Know your investors. It always helps to be sure of where the investment capital is coming from.
  2. Understand your growth path. Do not go for an IPO if you are not sure how your company is going to progress over the next five years.
  3. Make a corporate profile. Have a document ready to show your business principles, results and plans.
  4. Gather financial results for analysis. All quarterly results for the past three years along with a strong economic analysis in the document should help gain the confidence of your investors.
  5. Get an investment banker. Have a banker to take care of all the IPO formalities and be ready with a reasonable amount of cash because the new IPO process does not come cheap.

The actual process of an IPO would be as below:

  1. Register with the Securities and Exchange Commission (SEC).
  2. Decide on an IPO price and a date for listing after consulting with the management team and the investment banker.
  3. Advertise for the offering with the relevant IPO information. It is always better to have the investors know the organization is having an IPO so they can prepare the capital for investment.
  4. List the stock on the market. An IPO is officially complete after seven days of stock trading.

Advantages of an IPO:

  • Strong capital base
  • Better suited for acquisitions
  • Diversification of ownership
  • Better employee compensation and benefits

Disadvantages of an IPO:

  • Growth pressure. The investors in the IPO will need results to maintain their support in the company. If the company does not follow up the growth plans with actions, the investors may back out by selling stocks.
  • Lack of confidentiality. Going public makes the company liable to disclose company matters to the investors.
  • Restrictions on management. All important decisions will need to be approved by the investors.

A small enterprise should consider all the above before going public. Small businesses are less well-off compared to bigger companies, and are usually engaged with a small clientele, which can increase risk. But if the company is determined to stick to its growth path and has done adequate market research regarding its products and services, the IPO can very fruitful.