While some large and successful companies are still privately-owned, many companies aspire toward becoming a publicly-owned company with the intent to gain another source of raising funds for operations. An initial public offering (IPO) represents a private company's first offering of its equity to public investors. This process is generally considered to be very intensive with many regulatory hurdles to jump over. While the formal process to produce the IPO is well documented is a fairly well-structured process, the transformational process through which a company changes from a private to a public firm is more difficult.

A company goes through a three-part IPO transformation process: a pre-IPO transformation phase, an IPO transaction phase and a post-IPO transaction phase.

Pre-IPO Transformation Phase

The pre-IPO transformation phase can be considered to be a restructuring phase when a company sets the groundwork for becoming a publicly-traded company. For example, since the main focus of public companies is to maximize shareholder value, the company should acquire management that has experience in doing so. Furthermore, companies should re-examine their organizational processes and policies and make necessary changes to enhance the company's corporate governance and transparency. Most importantly, the company needs to develop an effective growth and business strategy that can persuade potential investors the company is profitable now and can become even more profitable. On average, this phase usually takes around two years to complete.

IPO Transaction Phase

The IPO transaction phase usually takes place right before the shares are sold and involves achieving goals that would enhance the optimal initial valuation of the firm. The key part of this step is maximizing investor confidence and credibility to ensure the issue will be successful. For example, companies can choose to have reputable accounting and law firms handle the formal paperwork associated with the filing. The intent of these actions is to prove to potential investors the company is willing to spend a little extra to have the IPO handled promptly and correctly.

Post-IPO Transaction Phase

The post-IPO transaction phase involves the execution of the promises and business strategies the company committed to in the preceding stages. The company should not strive to meet expectations, but rather, beat them. Companies that frequently beat earnings estimates or guidance are usually financially rewarded for their efforts. This phase is typically a very long phase, because this is the point in time when companies have to prove to the market they are a strong performer that will last.

(To learn more, see: IPO Basics Tutorial.)