IPO is the sale of stock that allows the general public to own equity in a company.The board members of a corporation are only part of the decision to take a company public.It is necessary to file paperwork with the SEC to make the transition from private to public legal.There are pros and cons to taking a company public.
Step 1: Hire an investment bank.
If you decide to go public, the first thing you need to do is hire an investment bank.The investment bank looks at your financial performance.It helps you register your IPO with the SEC and determine the price for it.The investment bank buys the shares on the day of the IPO.All of your shares will be purchased, and you won't be left undersold.The selling syndicate markets the shares to the public in exchange for a sales commission, while the underwrite syndicate is the investment bankers who guarantee the sale of the offering.Some firms can act as syndicates.Investment banks specialize in large-scale financial transactions.Some of the most well-known investment banks include Bank of America, Merrill Lynch, Warburgs, Goldman Sachs,Deutsche Bank, JP Morgan, Morgan Stanley, Salomon Brothers, and Credit Suisse.
Step 2: Evaluate offers from different banks.
Three to five institutions are invited to make bids.They will give a valuation of your company and how they think your stock will perform in the market.Determine the accuracy and thoroughness of their research.The company will be evaluated by the bank.They may work with a syndicate of banks to share the risk if they don't want to bear all of it on their own.If you're looking for a bank that knows your industry, look for one that has brought other businesses into the public eye.If you meet certain criteria, an investment bank will want to work with you.They look for revenues of $10 to $20 million and profits of $1 million.For the next five to seven years, they want projected annual growth to be high.
Step 3: A deal should be structured.
Discuss the amount of capital you want to raise.The bank will offer you a type of guarantee.They guarantee to raise a specific amount of capital by purchasing all of the shares and selling them to the public.A best effort agreement doesn't guarantee that all of the shares will be sold.When the market is unstable, this happens with high-risk securities.
Step 4: Understand how the bank makes money.
The bank makes money when you sell your shares.Banks typically earn between 1 percent and 7 percent commission.They can keep the difference between the price for which they purchased the shares and the selling price.The fee is called the underwriting fee.The costs to print and distribute investment prospectuses may be charged by the syndicate.The commission is paid to the investment bank for assuming all of the risk.When they purchase your shares, they are investing their own money.If they can't sell the shares to the public, they will lose money on the investment.You are offering 300,000 shares for $20 per share.The investment bank will purchase your shares for a 5 percent commission.You made $6 million when the bank bought all 300,000 shares for $20 per share on the day of your IPO.The bank keeps 5 percent of the commission.The bank sells the shares for $25 per share.They make a profit of $5 per share.The total amount of money earned by the bank was almost $2 million.
Step 5: Do due diligence.
All of the information that will be put into the registration document needs to be verified by the bankers, lawyers and accountants.The company's financial performance can be predicted by researching the industry and market.Accountants look for any discrepancies in historical financial statements and tax records.Customers are contacted to learn as much as possible about their relationship with the company and how they view it compared to their competitors.
Step 6: S-1 is a form with the SEC.
The initial registration form that is required by the SEC for new companies who are going public is known as the "Registration Statement Under the Securities Exchange Act of 1933."Before any shares can be sold to the public, the company must be approved by the SEC.Required information includes how you plan to use capital you raise, information about your business model and your competition in the industry, a prospectus that details information investors should know, and disclosure of any potential conflicts of interest.
Step 7: Sell some of your shares in the IPO.
If you or any of your private stock holders want to include any shares in the offering, this must be disclosed to the SEC in form S-1.This has to be worked out with the bank.The company would not get any of the proceeds from the sale.To avoid any hint of insider trading, specific requirements must be followed.Part 1, Section 7 of form S-1 contains this information.The amount of securities owned prior to the offering must be disclosed, as well as the nature of any relationship or position the security holder has had with the company or any of its affiliates within the last three years.The lock-up period is imposed by many investment banks.If you hold private stock in the company, you can't sell it for 90 to 180 days after the IPO.To avoid depressing the value of the stock, the purpose is to flood the market with shares.Any shares that are sold into the general market must be registered or private sale to someone who will be restricted by the same non-pubic sale rules.The company does not benefit from shares sold by insiders, but they increase the float.
Step 8: Wait for the approval.
The SEC imposes a cooling off period after receiving the registration document.The information provided in the registration documents is checked by the SEC.The SEC issues an effective date once the information has been verified.The public will be offered the stock on this date.
Step 9: Prepare a herring.
The brief prospectus details your company's business operations and projected financial performance.The number of shares you will be offering and the expected price of your shares are not included.It's used to communicate with potential investors.It gives them the information they need to make a decision about buying shares from the investment bank on the day of the IPO.
Step 10: Meet with potential investors.
Companies that trade securities in large quantities receive preferential treatment from institutional investors.Some examples of institutional investors are pension funds and life insurance companies.In order to get institutional investors to invest in your company, you will have to travel around the country.The dog and pony show is known as the road show.
Step 11: Accept subscription requests
The investors will subscribe to the offering if the pitch is successful.They made a commitment to purchase a certain number of shares from the bank on the day of the IPO.The exact price of the shares is not known, so the commitment is non-binding.The investors can back out if they so choose.The number of shares that can be purchased on the offering is usually limited.It is not in the best interest of the company to have a few dominant shareholders.
Step 12: The IPO price should be negotiated.
Set an initial selling price for your shares with your underwriter.The price will be affected by the nature of your company, the success of the road show and current market conditions.The price is determined by quantitative and qualitative factors.Demand, industry comparables and growth projections are some of the quantitative elements that affect price.Increased demand for your company's product may lead to a higher IPO price, protecting the offering price or causing it to go higher.Industry comparables and the IPO price of other companies in the same industry factor into the price.The valuation of your IPO will be impacted by your future growth projections.A product that will change the way things are done is a qualitative factor.
Step 13: You can choose a stock exchange.
The New York Stock Exchange is one of the stock exchanges that will make bids for your business.Your business could lead to increased trading with other IPOs.If your company is well-known, the exchange will want the prestige of being associated with you.There will be pitches from the different stock exchanges.The requirements for each exchange are listed.The majority of companies begin on the NASDAQ and go on to the New York Stock Exchange.Many companies have their stock traded on multiple exchanges.
Step 14: Money can be collected from investors.
The bank will purchase your shares on the day of your IPO.They will attempt to sell them to the public.The most favored customers of firms in the selling syndicate are the only ones who will be able to get in on the IPO.The average investor will not be able to buy your stock until later.The value of your company's stock will be higher than the initial offering price if the investment bank does a good job of promoting the sale.Don't be concerned if the price of your stock does not go up on your IPO.The most profitable companies start out slow but build value over time.The after-market for the shares is ensured by the setting of the offering price.The company doesn't receive any proceeds for shares that are above or below the offering price.If you include any of your privately-held shares in the offering, the proceeds will go to you, not the company.If the SEC approves the sale and the deal is disclosed in the S-1 form, it will happen.
Step 15: Financial communication processes need to be established.
Most of the financial communication takes place in the months and weeks leading up to the IPO.Once the IPO is over, the bank moves on and you are left to communicate financial information to a new set of stakeholders, like analysts, investors and employee-owners.A plan to publicly communicate company information is needed prior to the IPO.A reporting cycle defines when financial reports will be published.The SEC requires public companies to report financial data regularly.Communications with the public and potential investors are limited by law.Press releases can be used to promote key events, product development schedules and conference attendance.Communication with shareholders will lead to a positive relationship.Conflict resolution and future communication will be helped by this.
Step 16: Before your IPO, build relationships with institutional investors.
As soon as possible, you should be fostering these relationships.You can choose the best investment bank for your deal if you know it.Potential investors will commit to the purchase of shares during your road show if you allow them to become familiar with your company.Get to know analysts who cover your industry or business sector.Have them write reports about your company when you meet with them.Analysts can't publish reports to the public until after the stock has traded for a period.You should meet the bankers at their firms once you have a relationship with the analysts.Attend conferences to get to know institutional investors.
Step 17: Financial projections need to be realistic.
Don't get caught up in the excitement of the IPO and create financial projections that are impossible to meet.Have your financial projections reviewed by a neutral third party after you perform a stress test.Your credibility is protected by providing realistic projections.You run the risk of losing the trust of your investors if you miss your expectations for two or more quarters.
Step 18: Take the impact of the IPO into account.
The IPO will affect your financial statements.When preparing financial projections, include these impacts.The IPO will increase public company costs and non-cash, share-based compensation.The change in shares outstanding should be accounted for.Consider how you will use the IPO proceeds.If you are repaying debt, you should factor in any discounts and account for the impact to interest expense.
Step 19: Give enough time for road show presentations.
You should have enough time to prepare and rehearse your presentations.Work around the institutional investors' schedule.Conferences and IPO meetings may make them unavailable on certain dates.It is advisable to take at least one week for each presentation.Allow time for traveling and adjusting times.