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. 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 >>
  4. 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 >>
  5. What are some of the key reasons a large corporation might prefer to remain a private ...

    Understand the reasons why a large corporation would want to remain as private instead of going public through an initial ... Read Answer >>
  6. 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 >>
Related Articles
  1. Insurance

    Initial Public Offering (IPO) Explained

    An initial public offering (IPO) marks the start of a company's publicly traded life. Find out why companies undergo IPOs, and how the process works.
  2. Insights

    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.
  3. Insurance

    The Ups And Downs Of Initial Public Offerings

    Initial public offerings aren't the best option for every company. Consider these factors before "going public."
  4. Investing

    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.
  5. Investing

    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.
  6. Investing

    IPOs Are Becoming Less Attractive for Companies

    U.S. companies are choosing to be acquired instead of going public
  7. Managing Wealth

    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.
  8. Investing

    How An IPO Is Valued

    The initial valuation of an IPO can determine the success or failure of a specific stock - but how is that price determined?
  9. Small Business

    Why Companies Stay Private

    Many private companies prefer to stay private and find alternate sources of capital. Find out what firms have to gain by eschewing the windfall from a flashy IPO.
  10. Investing

    4 Reasons for the IPO Market Slowdown in 2016 (IPO)

    Pay attention to the length of time a company waits before going public and whether the prolonged period brings excessive valuation.
RELATED TERMS
  1. Going Public

    The process of selling shares that were formerly privately held ...
  2. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs ...
  3. Public Offering Price - POP

    The price at which new issues of stock are offered to the public ...
  4. Forced Initial Public Offering - IPO

    An instance in which a company is forced into issuing shares ...
  5. Eating Stock

    The forced purchase of a security when there are insufficient ...
  6. Offering

    The issue or sale of a security by a company. It is often used ...
Hot Definitions
  1. Death Taxes

    Taxes imposed by the federal and/or state government on someone's estate upon their death. These taxes are levied on the ...
  2. Retained Earnings

    Retained earnings is the percentage of net earnings not paid out as dividends, but retained by the company to be reinvested ...
  3. Demand Elasticity

    In economics, the demand elasticity refers to how sensitive the demand for a good is to changes in other economic variables. ...
  4. Dark Pool

    A dark pool is a private financial forum or exchange for trading securities.
  5. Quadruple Witching

    The expiration date of various stock index futures, stock index options, stock options and single stock futures. All stock ...
  6. American Opportunity Tax Credit

    A tax credit that enabled more student and parents to pay for part of their college expenses in the 2009 and 2010 tax years ...
Trading Center