Updated October 16,2020: 

The question of when does a company go public can be a difficult one to answer. There are several very large requirements and milestones that have to be met before a company can do this.

By going public, a private company’s IPO, or initial public offering, becomes an owned and publicly traded entity. It may be used by venture capitalists as a way to get out of an investment in a certain company.

The IPO process will start by making decisions with an investment bank, like the price and number of shares to be issued. The banks will then begin the task of underwriting. This just means that they become the owners of shares and take on the legal responsibilities of those shares.

The entire goal of underwriting is to sell shares to the public at a profit. These deals are typically valued in the hundreds of millions, or often billions, of dollars.

Why Does a Company Decide to Go Public?

When a company goes public, it is reaching a major milestone. There are so many reasons why a company wants to go public, which can include getting out of debt or getting financing that is away from the banking system.

Going public also helps reduce the total cost of capital and provides the company with more latitude when they negotiate bank rates that help to reduce the interest on the debt the company has.

A significant reason why companies go public is to raise a major amount of money while spreading the risk of ownership to a large group of shareholders. Spreading the ownership risk is particularly important as a company gets larger. The original shareholders will want to utilize some of the profits and hold onto a certain amount of the company.

Another major advantage to going public is to have the stock listed on the stock exchange.

Factors That May Qualify a Company for an IPO:

There are several factors that can qualify a company for an IPO:

  • A company has consistent and predictable revenue. A public market does not like for a company to miss earnings or have issues when predicting what they will be. A company needs to be mature to a point where the prediction of each quarter and the following year’s earnings can be reliably predicted.
  • The company needs to have the money to pay for the process of IPO. It is expensive to go public. Money from going public cannot always be utilized to fund those costs. There are many expenses that will have to be covered before the company actually goes public.
  • The company still needs to have growth potential. The market will not want to invest in companies that have no opportunity for growth. It will want businesses that have consistent earnings but still have the room for future growth.
  • A company needs to be a major player in the industry. As investors are searching for a niche of companies to buy into, they will look at them together as a whole. If a company is not performing as well or does not stand out against the competition, the investor will not be willing to pay much for it.
  • The company needs to have a strong and experienced management team. Leadership quality is among the most significant considerations when investors are looking at things other than the financial aspect. Also, C-level executives will have to speak on the earnings calls. They will need to be prepared and capable of dealing with this task.
  • The audited financials are required for all publicly traded companies.
  • The company needs to have a strong business process. This is invaluable even if the company remains private. Going public, however, means that every single component of the business process of a company will be scrutinized.
  • A company needs to have a low debt-to-equality ratio. It can make or break a successful IPO. It is difficult to get a great initial price with a highly leveraged company, causing it to have problems with its stock sales.
  • A company should have a business plan that has the financial aspects fully explained for the next five years so the market can tell that the company can see where it is headed.
  • Underwriters may require revenues of up to $20 million every year with $1 million profits.
  • The management team needs to demonstrate future rates of growth of approximately 25 percent per year within five to seven years.

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