Amir Baluch is the founder of FinancialWellnessMDwhich offers a range of financial educational materials for medical professionals.
How do private companies achieve an initial public offering (IPO)? The IPO is a big day for everyone involved in a company. It’s an exciting time for the entrepreneurs who launched the company, the team members involved in its growth, and the investors who supported the startup.
While an IPO may not always be the optimal or right exit for a company at any given time, it can certainly have its benefits. So, is an IPO right for your business? What should you do to be prepared for this big moment? How do you grow a company to this stage?
Bringing your company’s benefits to the stock market
For many, an IPO is the ultimate goal from the very beginning. For entrepreneurs, the IPO can be a sign of success and confirmation they are looking for. For those who have invested along the way, this is also often the moment they’ve been waiting for – the day it all pays off.
The IPO is a liquidity and capital event – one that allows the company to really tap into public markets and any funding they hold. For those involved, the IPO often provides substantial pop-in value. Company and shared values often skyrocket at the opening. I’ve noticed that stock prices tend to increase as the IPO process progresses and the media focuses on the story.
As a publicly traded company, the company may also seem more credible. This can open doors to more resources and customers that the company may not have been able to tap before.
In other cases, becoming a public company is really about finding the best way to enable the company to fulfill its mission and vision, even if it means installing new leadership, giving up a lot of control, and more regulation. must be embraced.
Going public is not for every founder. It does mean that you have to give up virtually all control over your company. Your shareholders will determine the direction of the company and its values, which may or may not take your company in the direction you dreamed of. Then there’s the constant pressure to think and act short-term to meet quarterly expectations, rather than focusing on the company’s long-term sustainability and success.
You may want to cash out and put your maturing business in the hands of others who can manage it at the next level. However, many entrepreneurs start a new project from scratch because of the excitement of moving fast and doing new things.
Determining if an IPO is the right choice
An IPO can be a great way for founders and investors to find an exit and make money from a maturing company. Finding the right time in the market and the right point in the business lifecycle are important considerations, just like selling any other investment. Other considerations include the following.
• Does an IPO match your corporate culture, mission and values?
• Is this the best move for your team?
• Is this the best choice for your customers?
• Is this the right thing to do for your investors?
• Are you okay with stepping down as CEO or staying CEO of a public company (which is very different from running a start-up)?
Alternative exit strategies
A traditional IPO is not the only option. SPAC offers are basically a backdoor IPO option. It takes the company public by selling the company to a public entity. These companies are often referred to as “blank check” companies.
A company can also merge with or be acquired by another public or private company. I’ve found this offers many of the same benefits as an IPO, especially the financial ones. Depending on who you sell to, this could produce an even greater exit and appreciation than you could justify based on traditional accounting methods.
If none of these options materialize right now, you can always raise more private equity capital. This can enable the company to grow and become self-sufficient or better positioned for an acquisition or IPO. It is now quite common for startups to go all the way through a Series D funding round.
Preparing to go public
An IPO is a major process. As an entrepreneur you will have to free up a lot of your agenda. I’ve found that fundraising, M&A, and IPOs can take up as much as 50% of a founder CEO’s time.
You will probably need a dedicated team to get everything in order, as well as experienced advisors, a strong CFO and an investment bank. Many materials and documents need to be collected, created, updated and uploaded to a data room, including financial statements and your pitch book. Then buckle up for the roadshow and get ready to fly and present a lot. Please note that it may take time six up to 24 months — or more — to prepare and get through an IPO.
What does it take to get your company ready for an IPO? There are different standards for being listed on different public exchanges. For the NASDAQ, companies will generally have revenues of at least $110 million and a market cap of $550 million.
Growing your business to this level requires:
• A highly talented and productive workforce.
• A strong leadership team.
• Board members with experience in taking companies public.
• Strategic partnerships.
• Good money management.
Prior to an IPO, a company can merge with or acquire others to expand and grow on its own. While growth often slows after going public, private companies must be able to demonstrate that they can sustain quarterly and annualized growth. They need to know how to force it if it subsides. This can include using effective PR and advertising campaigns and making deals to bring in more customers.
IPOs can be great times for founders, employees and investors. There is a lot involved in the IPO process; however, with focus and targeting the right metrics, pre-IPO companies can grow and find multiple exit options for their lenders.
The information provided here is not investment, tax or financial advice. You should consult a licensed professional for advice on your specific situation.