Introduction
Taking your company public through an Initial Public Offering (IPO) is a significant and often transformative milestone for a business. It marks the transition from a privately owned operation to one that is owned, at least in part, by the investing public. An IPO can unlock access to substantial capital, enhance your company’s reputation, and open the door to long-term expansion opportunities. However, this complex process also brings a host of challenges, regulatory requirements, and long-term implications that business owners must thoroughly evaluate.
If you’re considering an IPO, it likely means your company has reached a level of maturity, financial stability, and growth potential that makes it attractive to investors. But readiness involves more than just a strong balance sheet—it requires a seasoned management team, clear financial reporting, the ability to withstand market scrutiny, and a compelling growth story. This guide walks through the fundamentals of what an IPO entails, including the benefits, drawbacks, and steps involved, to help you make a fully informed decision about whether going public aligns with your company’s vision and goals.
What is an initial public offering (IPO)?
An IPO is the process by which a closely held company goes public. This means that the stock of your company will be available for purchase by the general public and will be publicly traded.
Should you go public?
The ideal public offering candidate is a company with an excellent management team, a great product, a sizable revenue stream with an established track record of revenue growth, and, according the Small Business Administration, annual growth potential of around 20 percent. You should be able to prove that you’ll provide a high rate of return on investments and should be willing to risk a substantial amount of money (perhaps $1 million or more) just to fund the IPO process. Most start-up businesses are not ready for a public offering, but there are exceptions. For example, if your product is revolutionary, your management team is experienced with public offerings, you have strong earnings and quarterly growth, and your owners and managers all have clean backgrounds, your business might be ahead of the curve.
What are the advantages of an IPO?
Potential to raise large amounts of capital
Depending on the success of your offering, you can raise huge amounts of capital through an IPO. This capital can then be used to support growth, upgrade equipment and facilities, increase working capital, pay off debt, hire additional staff, and expand research and development.
Attracting investors may become easier
If your offering is successful and the stock performs well, you may find it easier to raise additional capital from public and private investors. The security becomes more attractive to investors because your company has greater liquidity and its value can be more easily determined.
Increased public recognition of company name
Public offerings can bring prestige, visibility, and increased public recognition to the company and its owners. Local or regional success may spark national interest, increasing your opportunities for expansion.
Business may be considered more creditworthy
Because your bottom line will improve with a successful public offering, you may find that loans are more easily obtained and loan terms more favorable.
Stock can be used as an incentive
Your customers and employees will have the opportunity to become shareholders in your business. Thus, they may take more of a personal interest in the success of the company, which could improve job performances and sales. In addition, stock options and stock bonuses can be used to attract and retain key employees.
Reduction of risk through dilution of ownership
Bringing on additional owners reduces the risk of loss for existing owners. Risk is distributed among a greater number of owners, thereby reducing individual chances of loss.
What are the disadvantages of an IPO?
High initial cost
An IPO is an incredibly expensive endeavor. It could easily cost $1 million or more just to get the offering to market. Initial costs include legal and accounting fees; underwriters’ discounts (usually 6 to 10 percent of the offering’s gross proceeds); state and federal filing fees; registration fees; printing and mailing costs for registration statements, prospectuses, and stock certificates; and many others.
Enormous expenditure of time and energy
An IPO requires an enormous amount of preparation. The owners and managers of the company will likely need to focus all their attention on the process for several months before the actual offering.
Success of the offering is not guaranteed
Even after spending hundreds of thousands of dollars (or more), and months of preparation, there is still no guarantee that your offering will be successful. You could have the unpleasant surprise of finding that public interest is weak or even nonexistent.
Continuing cost of running a public company
Even if your offering is well received, you will have the continuing expense of operating a public corporation. Ongoing costs include administrative costs, taxes, key person life insurance, and legal fees.
Value becomes subject to outside influences
Once you become a public corporation, the value of your business will be affected by forces that are completely out of your control, including the economy, inflation, fluctuations in the stock market, business cycles of other industries, and others.
Pressure to pay dividends and maintain growth
Stockholders may exert pressure on the company to pay dividends, even though this might not be the best course of action for long-term prosperity.
Loss of control
If a significant portion of the company is sold to the public, you may lose control. Subsequent offerings may further dilute your ownership share, potentially putting you at risk for a takeover.
Loss of privacy
Once your company is a public corporation, stockholders are entitled to a great deal of information, including sales figures, profits, employee salaries and benefits, and pension information.
Process is basically irreversible
Once you go public, it is nearly impossible to reverse the process. Make sure you have considered all your options before you start down this path.
How do you do an IPO?
Don’t try this at home
IPOs are incredibly complex and technical. There are numerous legal and financial issues that must be addressed before, during, and after an IPO. Failure to comply with regulatory requirements on registration and disclosure can have disastrous consequences, so a team of experts should be hired to guide you through the entire process.
Hire a competent, experienced attorney
Your legal counsel’s primary task will be to make sure you are in compliance with all applicable state and federal securities regulations, advise you on any possible registration exemptions, and make sure you follow the proper steps to get your exemptions. Your attorney will also be the coordinator of the entire IPO process. The laws and procedures surrounding an IPO are extremely complex, and only an attorney experienced in this area should be trusted with this responsibility.
Independent accountants are also necessary
You will need to have your company’s financial statements audited by independent accountants. Information from the audit will be included in your offering forms. You should select your accountant and begin involving him or her in the financial life of your business at least two or three years before you plan to go public. The accountant can also help you analyze the financial and tax impact of proposed offering structures.
Choose an investment banker to guide you
Investment bankers and other advisors can help you select the appropriate source and type of capital to finance your IPO, as well as help you select the best time to make your offering.
Underwriters and selling agents round out the team
The main responsibility of underwriters and selling agents is to sell shares, although they may also provide a market for after-market resales. In some cases, underwriters may also stabilize the security price at a given level for a short time after the IPO. The underwriters will set the price for the shares after considering a number of factors.
Conclusion
Launching an IPO is not simply a financing decision, it’s a strategic move that alters your company’s DNA. While the prospect of raising significant capital, increasing your visibility, and attracting top talent can be compelling, these advantages must be weighed against the costs, both financial and operational, of becoming a public company. Increased regulatory oversight, pressure from shareholders, and the loss of full control are real considerations that require long-term planning and commitment.
If you do decide to pursue an IPO, surround yourself with experienced legal, financial, and underwriting professionals who can navigate the process and protect your interests. Prepare early, ensure your company meets all financial reporting and governance standards, and be realistic about your business’s readiness and valuation. An IPO can elevate your company to new levels of growth and influence—but only if executed with diligence, transparency, and the right team in place. With careful planning, going public could be a defining step in securing your business’s legacy and future.
Scarlet Oak Financial Services can be reached at 800.871.1219 or contact us here. Click here to sign up for our newsletter with the latest economic news.
Source:
Broadridge Investor Communication Solutions, Inc. prepared this material for use by Scarlet Oak Financial Services.
Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on individual circumstances. Scarlet Oak Financial Services provide these materials for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
