When should a company go public - Everything you need to know
Upon reaching a point of stable earnings and rising profit margins, companies often decide to take the next step in raising capital by going public.
Business going public is when a company chooses to opt for the initial public offering and becomes available on a stock exchange for public investors.
Through listing on the stock exchanges, the companies increase their capital investment and use it to grow and expand their business operations.
However, any company aiming to boost its business cannot apply for an IPO. There are specific prerequisites to be met before a company decides to go public.
The company uses public funds to finance its future plans and acquisitions; therefore, it becomes obliged to make judicious utilization of the funds and be accountable for the capital raised.
What does going public or IPO mean in business?
Going public is when a private company decides to go public by issuing an Initial Public Offering (IPO). It is the first step that companies take to shift from private to public corporations.
The IPO refers to the first-time issue of shares to the public with a pre-determined price band.
Through IPOs, investors and traders get an opportunity to become a shareholder in the company and do active intraday trading to earn profits respectively. The investors also earn dividends against the number of shares held by them.
As previously mentioned, any company cannot decide to go public on its own.
The stock exchanges have specific listing requirements that need to be fulfilled by the company deciding to go public.
The company needs to understand the market and its fluctuations, adhere to the market regulator norms and procedures for the IPO process, and be as transparent as possible in presenting incomes and gains.
Why does a company decide to go public?
We are often struck with one question – "When there are multiple options to raise capital, why does a company go public?"
Listed below are the reasons why a company decides to go for an initial public offering.
1. Increases business visibility
By issuing IPOs, companies try to promote their business and increase brand awareness.
As the company approaches closer to the IPO, retail and institutional investors begin a thorough research of its offerings and business model.
To understand the company's background, they analyze its financial statements and records, past acquisitions and mergers, total market value, peer comparison, annual reports, credit rating, and more.
2. Improve company's credibility
Stock exchange regulators like the Securities and Exchange Board of India (India), Financial Conduct Authority (UK), and Securities and Exchange Commission (USA) are authorized agencies to oversee the financial markets and protect the rights of the investors.
A company that goes public has fulfilled and cleared the requirements as set by the regulator.
Through multiple rounds of authentication and validation, the regulatory body allows the company to get publicly listed. Hence, increasing a company's credibility among the investors.
3. Cost-effective alternative for a company
Alternatives like bank loans or venture capitalists might not sound appealing to all companies.
A bank loan can bring down a company's financial worthiness, whereas not every company qualifies for series funding.
The last resort for companies is stock markets.
Companies can quickly raise capital and use it to scale their business functions and expand product features and offerings through stock markets or any other financial market.
4. Serve the shareholders better
By raising funds via the stock market, companies can return the customers and shareholders their fair contribution for investing in the company.
When retail investors invest their money in a company, they expect returns for it.
Moreover, by rational utilization of these funds, companies can stretch their profits and keep a reasonable reserve for dividends, boosting investor confidence and increasing the earnings per share.
Key points for your business to consider before going public
Before a business becomes IPO-ready, various factors need to be addressed because every company listed on the stock exchange is not always successful and still struggles to attract investors.
To create a buzz surrounding the company's IPO, the management should continuously optimize each department and function.
Once the company becomes public, the shareholders will monitor every business action closely.
The direct effect of any positive or negative news will be witnessed in the share price.
So, how does a company know if they are IPO-ready or not?
1. Meet regulatory requirements
Before applying for an IPO, companies need to check whether they satisfy the conditions to make their company public.
Every stock exchange regulator has its own set of norms that decide which company is eligible for trading on the stock exchange.
Therefore, before taking a business public, the management needs to meet the regulatory requirements and conduct primary research within the company to understand the current and future abilities of the employees.
2. A firm understanding of the company's future short and medium-term performance
Companies can estimate their revenue and sales projections based on the existing resources and infrastructure.
Firms can even predict their performance in the near future by considering their internal and external factors.
With a rough overview of the organization's upcoming conduct, the management can plan if they want their company to go public.
If the estimation ends on a negative note, it is pretty obvious the company is still not IPO-worthy.
3. Predictable and consistent revenue
If an organization has a fluctuating earnings ratio and the inability to improve or stay consistent with income gains – it points to its failure in tackling business uncertainties.
These figures are displayed in the company's financial statements and are enough for an investor to decide the non-worthiness of an IPO.
Before heading out to an IPO, the management needs to be mindful of how its finances are performing.
4. Getting the product & vision right
An investor directly invests in the product that your company is manufacturing or dealing with.
Any successful business is established with a well-created and customer-oriented product.
If a company makes an average-level product with no customer focus and expects to gain a hundred percent IPO subscription – they have highly underestimated the investor knowledge.
Companies need to be very straightforward and precise with their product development and vision to qualify for an IPO listing.
5. The right executive team is in place
Ahead of the IPO process, dedicate a team that strictly analyzes the chances of getting listed on the stock exchange.
They begin right from financial and accounting analysis and end with providing the estimated cost to go public.
With a devoted team within the organization, they can act as a critic of its performance and decisions and how things like these will affect the company's listing.
6. Growth potential in the market
A business going public means extracting financial resources from the investors and ploughing into the business to generate income.
The incoming funds need to be utilized to their best ability to pay out the dividends to the shareholders.
If the company sees no potential in going public, it is best not to.
Because collecting the funds and not making the correct use of them, will only hamper the public image and cause dissatisfaction among the shareholders.
If the business has no solid pathway to increase the revenue by public listing, it is advisable not to exploit investor funds.
Revenue and growth potential are sufficient to reward existing shareholders and attract potential investors through an IPO.
Among all the multiple reasons that attract public investors, positive revenue and growth projections are the main drivers of an IPO.
Investors consider it an excellent bet if the company shows an upside trend in sales, profitability, and return on equity.
7. Audit ready
Companies going public need to be audit-ready all the time. Since they are in the public eye, the investors are always keen to know what the financials reflect about the company's performance.
8. The debt-to-equity ratio should be low
One of the most important factors in knowing the amount of capital that a company is leveraging is calculating the debt-to-equity ratio. The higher the percentage, the more riskier the stock is.
The ideal debt-to-equity ratio is 1:2, meaning there is double equity for every dollar of debt.
A high ratio indicates heavy dependence on external liabilities and is not recommended for investment.
What are the market factors to consider before going public?
The stock market is either bearish or bullish.
A bearish market is one where the stocks witness a deep fall in prices owing to a company's internal reasons or external factors that affect the entire market.
In contrast, a bullish market shows an uptrend in the share prices owing to positive factors affecting the stocks.
While timing the market is never a good move to identify the correct trend, still, companies should consider doing technical analysis before selecting a time frame for the IPO.
An IPO that goes live during a bearish market has lower chances of full subscription as the investors liquidate their shares and consider staying out of the trend.
Therefore, intense research and knowledge of the market are the ways to choose the right time for taking a business public.
Is going public feasible for your business?
As mentioned earlier, not every business qualifies to file for an initial public offering.
A business going public sure offers a wide range of benefits to the company and the shareholders. However, not all businesses have the ability to survive the strong blows of the market.
Mentioned below are some of the reasons why going public might not be the best option for your business.
Management and promoters pressure
Equity shareholders become the owners of the company they invest in during the IPO.
As owners, they have complete authority to participate in the annual meetings and vote on all essential decisions.
The most significant disadvantage that companies face here is the dissatisfaction among the promoters over losing control of the business's affairs.
Earlier, they were the sole decision-makers related to all the business matters and concerns. Additionally, their share in the company dilutes with going public as the number of shareholders increases.
Performance and revenue pressure
Since the company is in the public limelight, retail and institutional investors study and analyze every piece of the financial report.
Hence, companies are constantly under pressure to perform well in all aspects, as under-performance will hit their share prices.
The investors are intolerant of any decline in profitability and earnings figures.
Immediate withdrawal of investments can be seen if the company fails to perform well in its quarterly reports.
Decline in privacy
Certain internal matters are critical to a company's position in the market.
Once a company applies for an IPO, all the decisions affecting it should be disclosed to the public, whether the judgments are negative or positive.
Alternatively, the competitors purposely leak private matters to bring down the share price in some circumstances. This gives them an advantageous position over your company.
Final words
Taking a business public is a significant move for any organization.
If the company believes in its vision and can generate profits through an IPO while surviving the market fluctuations – it should not hesitate.
On the other hand, if a company is yet to develop its potential and cannot withstand peer competition, it should not participate in this world of uncertainty and risk.