Taking your business from a private company to a public one is a big decision with many implications for how it will be managed. How do you decide if you should take your company public and/or if it is ready?

Making that decision should be broken down into two areas. First: are you ready to run a public company? And second: is the company ready to go through the initial public offering (IPO) process?

Here are some things to consider in both areas before jumping in. (For related reading, see: The Road to Creating an IPO.)

Leadership Preparation

Running a private company—even one with investors—is very different from overseeing a public entity. Once you go public, an owner's job description gets altered to include things like increased communication with investors, media and the analyst community. This communication becomes trickier as everything the CEO says gets taken as insight, even if he or she didn't mean it the way it came out. Media training may be a very good investment before you start the IPO process.

You will also need to become a master story teller as, sadly, Wall Street is more focused on what a company does today rather than what its long-term plans are. You must learn how to tell a great long-term story so you get the buy-in from investors and analysts. How Jeff Bezos runs and creates the story around Amazon.com (AMZN) is a great example of how this can be done.

In addition to telling your story, you need to be emotionally ready for the constant questions that come your way not only during the road show but with every earnings call and analyst day. You need to be "on" and ready to go at any time when probing questions begin. (For related reading, see: The Biggest IPO Flops.)

If you are the founder or have been with the company for many years, it may be hard to adapt to the removal of many of the freedoms you used to have. Going public will require you to talk to your board and provide more paperwork to investors than you ever thought possible. Wall Street does not like to be taken by surprise; if there are surprises, the result may be damage to the value of your stock.

Grooming Your Company

When looking at the company to see if it is ready for an IPO, look at these factors to determine if now is the time:

  • The company has predicable and consistent revenue. Public markets do not like it when you miss earnings or have trouble predicting what they will be. Your business needs to be mature enough that you can reliably predict the next quarter and the next year's expected earnings.
  • There is extra cash to fund the IPO process. It is not cheap to go public. Don't anticipate that you can use the funds from going public to pay for those costs as there are many expenses that start occurring long before you actually become public.
  • There is still plenty of growth potential in your sector. The market does not want to invest in a company with no growth prospects; it wants a company with reliable earnings today but one that also has lots of proven room to grow in the future. (For related reading, see: How an IPO Is Valued.)
  • Your company should be one of the top players in the industry. When investors are looking at buying in, they will compare you to the other firms companies in your space. If you are just average compared to competitors, investors won't pay as much for you. Work on being one of the best companies in your industry before you go public.
  • In addition to preparing yourself for being public, you need to have a strong management team in place. The quality of your leadership is one of the biggest factors that investors look at outside of the financials. Additionally, many of your C-level executives will have to talk on earnings calls, so they should be prepared and able to manage that aspect too.
  • Audited financials are a requirement for public companies and it takes a while to complete this process. You may want to consider going through this as a trial before you have to do it for the actual IPO. It will allow you to clean up any issues that might exist within your entity. 
  • There should be strong business processes in place. This one is valuable even if you decide to stay private, but if you are about to be public, how you handle each aspect of running your firm will be critiqued.
  • The debt to equity ratio should be low. This ratio can be one of the biggest factors in derailing a successful IPO. With a highly leveraged company, it is hard to get a good initial price for the stock and you may encounter stock sales problems. Before you go public, reduce debt or refinance to try for better terms.
  • Having a long term business plan with financials spelled out for the next 3 to 5 years will help the market see that you know where your firm is going. (For related reading, see: Investing in IPO ETFs.)

It's a good idea to hire high-quality advisors that specialize in taking companies public. They can help you run through your numbers to see if being public is right for you. It may make more sense to sell out to another firm instead of going public.

Do a Practice Run

Try and run your business for a year or two as if you are already public. While you won't have the analysts and media calling, you will be able to make sure that you have the above items mastered. Do you consistently meet your earnings, is your planning process accurate? How much time does the process add to your workload?

This experience can be invaluable when you actually go through the IPO process and it gives you time to clear up any issues before debuting on the market. 

The Bottom Line

Taking a business public is not easy. The above advice will help ensure that you and your firm are ready not only for the IPO itself, but for the realities of being a public company that's able to generously sustain itself and make a sometimes fickle investor community happy. (For related reading, see: If You Had Invested Right After Nike's IPO.)

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