What "Going Public" means
Going public refers to the process by which a privately held company transitions into a publicly traded company by offering its shares to the general public through an initial public offering (IPO) or another method. A public company sells a portion of its ownership, represented by shares, to outside investors. These shares can be traded on stock exchanges.
Requirements for listing in stock exchange in the US
A company must meet requirements laid out by the underwriters. Here are some
requirements for listing.
- Business should be mature enough to forecast earnings reliably for the next quarter and the following year.
- There is extra cash to fund the IPO process.
- There is still plenty of growth potential in the business sector.
- The company should be one of the top players in the industry.
- There should be a strong management team in place.
- Audited financials are a requirement for public companies.
- The company has a long-term business plan with financials spelled out for the next three to five years to help the market see that the company knows where it’s going.
- The debt-to-equity ratio should be low. This ratio can be one of the biggest factors in derailing a successful IPO.
The debt-to-equity ratio is a very important metric that all investors look at before investing in a company. A low debt-to-equity ratio is a sign that the company is in good financial health and that it has a good chance of success. However, if the debt-to-equity ratio is too high, it can be a sign that the company is taking on too much debt and is not able to manage its finances properly. This can lead to financial issues that can derail a successful IPO, and ultimately, the company’s long-term viability. As such, it is important to make sure that the debt-to-equity ratio is kept low in order to ensure the company’s success and long-term financial stability.
What are the advantages and disadvantages of a company going public?
Advantages: Strengthens capital base, makes acquisitions easier, diversifies ownership, and increases prestige. The most obvious advantage is the ability to raise capital. Capital can be used to fund research and development (R&D), fund capital expenditure, or pay off existing debt.
- Efficient access to capital market to raise money through equity and bond offerings
- Flexibility to trade shares with high liquidity and daily valuation
- Greater attention, better brand recognition and prestige with consumers
- Shares functioning as new liquid M&A currency
- Potential to diversify wealth on shareholder side
- Enhanced ability to attract, retain and reward valued employees as listed company
- Opportunity to bond and incentivize key people with long-term incentive plans
Disadvantages: Puts pressure on short-term growth, increases costs, imposes more restrictions on management and trading, forces disclosure to the public, and makes former business owners lose control of decision making.
- Time-consuming tasks, particularly investor relations
- Greater transparency and disclosure requirements
- Total IPO floatation costs
- Add-on costs associated with the ongoing requirements as listed company
- New investors with voting rights
- Pressure to deliver on your promises
- Corporate governance duties
Is it better for a company to be Public or private?
The decision of whether it is best for a company to be public or private is a complex one and will depend on the specific goals of the founders and the company. Staying private can give founders more control over the running of the company and they can avoid having to meet all the regulatory requirements that come with being public. On the other hand, going public can give the company access to a large amount of capital which can be used to grow the business. Ultimately, the best decision for the company will be based on the unique circumstances and goals of its founders.