A:

Going public refers to a private company's initial public offering (IPO), thus becoming a publicly traded and owned entity. Businesses usually go public to raise capital in hopes of expanding; venture capitalists may use IPOs as an exit strategy - that is, a way of getting out of their investment in a company.

The IPO process begins with contacting an investment bank and making certain decisions, such as the number and price of the shares that will be issued. Investment banks take on the task of underwriting, or becoming owners of the shares and assuming legal responsibility for them. The goal of the underwriter is to sell the shares to the public for more than what was paid to the original owners of the company. Deals between investment banks and issuing companies can be valued at hundreds of millions of dollars, some even hitting $1 billion.

Going public does have positive and negative effects, which companies must consider. Here are a few of them:

  • Advantages - Strengthens capital base, makes acquisitions easier, diversifies ownership, and increases prestige.
  • Disadvantages - Puts pressure on short-term growth, increases costs, imposes more restrictions on management and on trading, forces disclosure to the public, and makes former business owners lose control of decision making.

For some entrepreneurs, taking a company public is the ultimate dream and mark of success (usually because there is a large payout). However, before an IPO can even be discussed, a company must meet requirements laid out by the underwriters. Here are some characteristics that may qualify a company for an IPO:

  • High growth prospects
  • Innovative product or service
  • Competitive in industry
  • Able to meet financial audit requirements

Some underwriters require revenues of approximately $10-$20 million per year with profits around $1 million! Not only that, but management teams should show future growth rates of about 25% per year in a five- to seven-year span. While there are exceptions to the requirements, there is no doubt over how much hard work entrepreneurs must put in before they collect the big rewards of an IPO.

To learn more about the process of going public, check out the IPO Basics tutorial.

RELATED FAQS
  1. What are the advantages and disadvantages for a company going public?

    An initial public offering (IPO) is the first sale of stock by a company. Small companies looking to further the growth of ... Read Answer >>
  2. What is the difference between an IPO and a seasoned issue?

    Learn how companies issue IPO securities when they first go public and seasoned issue shares if they sell more shares in ... Read Answer >>
  3. Are IPOs available to short sell immediately upon trading, or is there a time limit ...

    The quick answer to this question is that an IPO can be shorted upon initial trading, but it is not an easy thing to do at ... Read Answer >>
  4. What are the different types of IPO issued?

    Learn about the two ways for a company to go public: fixed price and book building. Under fixed price, the share price is ... Read Answer >>
  5. What does the underwriter do in a new stock offering?

    Learn the role an underwriter plays for an initial public offering, and the steps an underwriter takes in preparing for an ... Read Answer >>
  6. Who can get access to a highly anticipated IPO?

    Purchasing a highly anticipated initial public offering may seem like a sound investment strategy, but most individual investors ... Read Answer >>
Related Articles
  1. Markets

    Why Are Companies Taking Longer To Go Public?

    Learn why private companies are waiting longer to have their IPOs. Understand why it may be more advantageous for a company to stay private.
  2. Fundamental Analysis

    Top Reasons IPO Valuations Miss The Mark (MS, ZNGA)

    The costly services of investment banks don’t necessarily guarantee accuracy in IPO pricing.
  3. Entrepreneurship

    IPO 101: What You Need to Know About Going Public

    Taking a company public isn't easy. Here's what you need to know to make sure you and your firm are prepared for the realities of being a public entity.
  4. Investing Basics

    The Pros And Cons Of A Company Going Public

    Small companies looking for growth often use an initial public offering to raise capital. But going public brings both advantages and disadvantages.
  5. Investing News

    6 IPO Market Trends to Watch in 2016

    Find out more about the outlook for the initial public offering (IPO) market in 2016. Is it expected to improve or will it be more of the same?
  6. Investing Basics

    How An IPO Is Valued

    The process of determining a company’s initial share price includes quantitative and qualitative components.
  7. Investing

    IPO Winners For 2011

    These IPOs didn't get hyped like LinkedIn and Groupon, but they were much more successful.
  8. Investing

    How To Track Upcoming IPOs

    Interested in investing through IPOs? Here is the list of free sources for information on upcoming IPOs.
  9. Investing Basics

    What is a Public Company?

    A public company has sold stock to the public through an initial public offering (IPO) and that stock is currently traded on a public stock exchange.
  10. Trading Strategies

    IPO Flippers And The Companies Who Hate Them (TWTR, ETSY)

    Learn how flipping activity affects an initial public offering.
RELATED TERMS
  1. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs ...
  2. Going Public

    The process of selling shares that were formerly privately held ...
  3. Public Offering Price - POP

    The price at which new issues of stock are offered to the public ...
  4. IPO ETF

    An exchange-traded fund that focuses on stocks that have recently ...
  5. Forced Initial Public Offering - IPO

    An instance in which a company is forced into issuing shares ...
  6. Public Company

    A company that has issued securities through an initial public ...
Trading Center