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?

    Small companies looking to further the growth of their company often use an IPO as a way to generate the capital needed to ... Read Answer >>
  2. 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 >>
  3. How can average investors get involved in an IPO?

    An initial public offering, or IPO, is the first sale of stock by a new company, usually a private company trying to go public. ... 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. Investing

    The Road To Creating An IPO

    Through an Initial Public Offering, or IPO, a company raises capital by issuing shares of stock, or equity in a public market. Generally, this refers to when a company issues stock for the first ...
  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. 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."
  6. 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.
  7. 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.
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. 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. Financial Statements

    Records that outline the financial activities of a business, an individual or any other entity. Financial statements are ...
  2. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
  3. Money Market

    A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. ...
  4. Block (Bitcoin Block)

    Blocks are files where data pertaining to the Bitcoin network is permanently recorded.
  5. Fintech

    Fintech is a portmanteau of financial technology that describes an emerging financial services sector in the 21st century.
  6. Ex-Dividend

    A classification of trading shares when a declared dividend belongs to the seller rather than the buyer. A stock will be ...
Trading Center