4 Signs A Private Company Is Going Public

By Angie Mohr | March 13, 2012 AAA

When a private company makes plans to go public, there is rarely any fanfare or advance notice. Some of the radio silence is due to SEC requirements in relation to official filings of notices and the prospectus, and some is simply due to the fact that a company going public is often big news and puts the corporation under a magnifying glass. It is easier for a company to make preparations in the relative solitude of anonymity. There are, however, several signs, prior to the official notification and filing, that can indicate that a company is about to make the big leap.

SEE: IPO Basics

Corporate Governance Upgrades
Public companies that trade on U.S. stock exchanges are required under the Sarbanes-Oxley Act of 2002 (SOX) to maintain certain standards in the management of the corporation. These standards include having an external board of directors, developing and assessing an effective set of internal controls over the financial management of the company, and creating a formal process where employees and others can have direct access to the audit committee to report on illegal activities, as well as those that violate company policy. A sudden flurry of new policies and procedures could be an indication of a move towards an initial public offering (IPO).

"Big Bath" Write-Downs
Public companies, and those that are about to go public, have their annual and quarterly financial statements scrutinized by investors and analysts. Private companies considering going public often assess their own financial statements and take any write-offs they are allowed under GAAP all at once, to present better income statements in the future.

For example, accounting rules require that companies write down inventory that is unsalable or worth less than its original cost. However, there is substantial leeway in making that determination. Companies often keep inventory on their balance sheets as long as possible to ensure that they are meeting asset ratios for banks and other lenders. Once a company contemplates going public, it often makes sense to write off the inventory sooner rather than later, when it would impact shareholder profitability.

Sudden Changes in Senior Management
Once a company contemplates going public, it has to think about how qualified its current management is and whether it is need of some spring cleaning. To attract investors, a public company needs to have officers and managers who are experienced and have a track record of leading companies to profitability. If there is a full scale overhaul in the upper echelons of a company, it may be a signal that it is trying to improve its image in advance of going public.

Selling-Off Non-Core Business Segments
A company that springs up from scratch can often have some business units attached to it that are ancillary to its core, or main, business purpose. An example of this is an office supplies company that has a payroll processing business; the secondary business does not connect directly to the main business. In order to market a company in an initial public offering, the prospectus is expected to show a clear business direction. If a company is shedding its non-core operations, it may be a sign that it is getting lean and mean in preparation for a public share offering.

The Bottom Line
Because of the ability of a private company to keep quiet on its intentions to go public until the formal SEC-required filings and announcements, it can be difficult to assess whether a company is heading in that direction. However, there are always more subtle signals for those seeking them out.

SEE: How An IPO Is Valued

You May Also Like

Related Articles
  1. Investing Basics

    How Does Alibaba Make Money? A Simple ...

  2. In 2014, stock markets traded at record levels and the US IPO market enjoyed activity not seen since the 2000 tech bubble. Here is a snapshot of some of the year’s most successful IPOs.
    Investing News

    5 IPOs That Broke The Markets In 2014

  3. Investing Basics

    Alibaba IPO: Why List In the U.S.?

  4. Despite a booming market, some IPOs crashed and burned. Sure, going public brings a flood of capital, but it can also expose a company to unpredictable market forces.
    Investing News

    IPO Stinkers: The Biggest IPO FAILS ...

  5. Investing Basics

    The 10 Biggest Latin American Banks

Trading Center