Not all companies are ready for an initial public offering (IPO), and "going public" too soon can be disasterous to some businesses. All of the following should be considered before an initial public offering:
- Does the company have the "right stuff"? – This generally includes such things as a disciplined and experienced management team, strong financial control, a good financial outlook, a large target market, a sustainable business model, and a good competitive market position.
- Does the company meet the criteria set by bankers and investors? – To be underwritten by a top tier investment banking firm, the typical IPO candidate will be profitable or at least show a clear path to profitability, have quarterly revenues of $15 to $20 million, show signs of strong market growth, have a post-IPO valuation of at least $200 million, and a proposed offering size of at least $40 million. However, these rules will differ wildly depending on your industry. If your company has an unusually innovative product or an exceptional management team, bankers and investors will probably ignore a deficiency in the other criteria.
- Would the company’s offering benefit from additional milestones? – This is basically a question of timing. Sometimes it is better to get more "seasoning" or show greater profit growth to give investors more confidence in your company.
- Is the company prepared to operate under the obligations of going public? – This is a question of confidence and whether the management team knows what it is doing. The management team must be able to deal with the burdens of completing registration with the SEC, presenting a viable business model, restricting publicity during the offering process, meeting SEC disclosure requirements, meeting stock exchange listing requiremets, and relinquishing control to public investors while still maintaining profit growth.
- Is an IPO the best route to achieving the company’s objectives? – This requires a great deal of research and soul-searching. Other methods of raising capital and prestige are always available and are sometmes faster, cheaper, and much less burdensome. Presenting an initial public offering is a very long and complicated process and also contains continuing burdens, so don’t do it if you are looking for some quick cash or five minutes of media attention.
The timing of the initial public offering is probably the most difficult question to answer. Using an IPO when the market is "hot" often gives a higher valuation and is very competitive with other similar companies, but results can falter in subsequent quarters when the market cools off, creating frustration in management and disappointment for stockholders. This is especially dangerous if your company is not completely ready for such a venture.
Market windows can also be seasonal. Although it is simply a rule of thumb, generally late August is a poor time to bring a new IPO to the market because many investors are enjoying their last weeks of summer with their families before the school year begins for children. The Thanksgiving and Christmas holidays are also traditionally difficult times to bring new offerings.
Bringing an initial public offering to market is a very complicated process that could make or break your company. Consulting a business attorney, especially one with investment or financial experience, can save your company an invaluable amount of time and energy.