An SMB Owner’s Handbook to Initial Public Offerings (IPO)

Is your private business struggling to raise capital? Are you thinking about going public but unsure of the risks involved?

I’m AJ, and I recently sold my business for multiple seven figures. Now, I help other entrepreneurs succeed through Small Business Bonfire. Let me share what I’ve learned about the benefits and risks of going public through an Initial Public Offering (IPO).

**Key Points:**
– An IPO is when a private company offers shares to the public for the first time.
– It allows early investors to cash in their stakes and public investors to buy shares.
– Companies must meet certain checkpoints and comply with SEC regulations to go public.
– An IPO can boost a company’s growth by providing more capital for expansion, research, and reducing debt.

**How Does an IPO Work?**
Before an IPO, a business is private, meaning only private investors hold its shares. As the company grows and becomes capable of handling SEC regulations, it decides to go public. When this happens, private shares convert to public shares, and the stock becomes available for public trading. This transition allows the business to raise more capital and expand.

**Why Companies Go Public:**
– Access to more capital for growth and expansion.
– Attracting potential employees with stock options.
– Increasing transparency, which can lead to better credit borrowing terms.
– Public visibility of the company’s financials.

**A Brief History of IPOs:**
The concept was popularized by the Dutch when they offered shares of the Dutch East India Company to the public. Since then, many companies have used IPOs to raise capital. The tech industry, in particular, saw a surge in IPOs during the dot-com boom, although the 2008 financial crisis slowed the trend. Today, IPOs are more common, with many companies issuing them each year.

**Key IPO Terms:**
– **Common Stock:** Represents ownership in a corporation. Shareholders can vote on corporate policies and receive dividends.
– **Issued Price:** The initial stock price at the time of the IPO.
– **Lot Size:** Number of shares traded in one transaction.
– **Preliminary Prospectus:** Offers crucial information to potential shareholders.
– **Price Band:** The range within which IPO shares are issued.
– **Underwriter:** Evaluates and assumes another party’s risk, helping sell the stock on the public exchange.

**IPO vs. SPAC:**
While both are ways for companies to go public, in a SPAC, a private business merges with a shell company to become publicly traded. SPACs can be less stringent in due diligence but may lack the support of underwriters.

**The IPO Process:**
The IPO process typically takes 12 to 18 months and includes several steps:

1. **Preparing Proposals:** Underwriters present offerings for comparison.
2. **Selecting an Underwriter:** The company agrees on terms with the chosen underwriter.
3. **Creating IPO Teams:** Teams of professionals are assembled to ensure smooth operations.
4. **Compiling IPO Documentation:** The S-1 Registration Statement is filed.
5. **Marketing and Updates:** The company promotes share issuance and finalizes the offering price based on demand.
6. **Meeting SEC Requirements:** The company forms a board of directors and complies with listing standards.
7. **Issuing Shares:** Shares are offered to the public on a designated IPO date.
8. **Post-IPO Details:** Finalizing underwriter provisions and possibly observing quiet periods.

**Advantages and Disadvantages of an IPO:**
**Pros:**
– Broad investment access, leading to more capital.
– Increased transparency and potentially better credit terms.
– Potential for attracting talent with stock options.

**Cons:**
– High costs of going public and maintaining a public company.
– Fluctuations in stock prices can distract management.
– Disclosure of sensitive information may benefit competitors.

**Alternatives to an IPO:**
– **Direct Listing:** Skips the underwriting process, suitable for fast-growing, well-known brands.
– **Dutch Auction:** Investors bid on shares, and those willing to pay the highest prices get the shares.

Before investing in an IPO, it’s crucial to read the company’s prospectus to understand its financials and growth potential. Creating an account with a brokerage firm that sells the desired stock is another necessary step.

**Stock Performance Post-IPO:**
After the lock-up period expires, stocks often decline as insiders sell their shares. This period prevents immediate sale of shares, typically lasting at least 90 days.

**Conclusion:**
An IPO is a significant step for any company, providing a path for raising capital and expanding. It’s essential to weigh the advantages and disadvantages carefully before proceeding. If you’re considering taking your company public, share your questions about the process!