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While some large and successful companies are privately-owned, many aspire to “go public.” An initial public offering (IPO) represents a private company’s first offering of its equity to public investors. This process is considered intensive and includes many regulatory hurdles to transform from a private to a public firm.
Key Takeaways
- The first stage is a restructuring phase when a private company sets the groundwork for becoming publicly-traded.
- The IPO transaction phase usually occurs before the first public shares are sold.
- The post-IPO period involves the execution of business strategies for long-run success.
1. Pre-IPO
The pre-IPO transformation stage is a restructuring phase when a private company sets the groundwork to become publicly-traded. The company may acquire management with publicly traded company experience. Companies may reexamine their organizational processes and policies. They might enhance the company’s corporate governance and transparency.
The company will likely develop and articulate an effective growth and business strategy. Such a strategy can persuade potential investors that the company will be profitable. To prepare for scrutiny from Securities and Exchange Commission (SEC) regulatory officials and the public, management should ensure the company’s operations, financial health, and governance are in order. This phase may take one to two years to complete.
Tip
Companies preparing to go public may need to provide two years of audited financial statements and have the infrastructure to produce quarterly and annual financial statements post-IPO.
2. IPO Transaction Stage
The IPO transaction phase involves achieving goals that enhance the firm’s initial valuation. Companies may choose reputable accounting and law firms to handle the formal paperwork associated with the filing.
During the IPO transaction stage, expectations may collide with reality and the IPO may fail. As the IPO approaches, it becomes necessary to find investors willing to pay what the company is estimated to be worth.
Some IPOs, such as Uber, faced difficulties with investors’ questioning the valuation. Other IPOs fail, such as WeWork’s, which was cancelled shortly before the firm was supposed to go public.
Fast Fact
A roadshow is the series of sales presentations conducted in multiple locations leading up to an initial public offering (IPO). It is a promotion made by the underwriting firm and a company’s management team to potential investors.
3. Post-IPO
The post-IPO transaction stage involves the execution of the business strategies the company committed to investors. Companies that frequently beat earnings estimates are usually financially rewarded for their efforts. This stage commonly reveals which companies will be successful in the long-run.
The firm’s management must deal with stock price fluctuations in the post-IPO transaction stage. Newly publicly traded firms and their Chief Financial Officers (CFO) must focus on regulatory compliance and reporting, quarterly and annual reporting, SOX compliance, and annual meetings.
What Are the SEC Financial Reporting Regulations for Publicly Traded Companies?
What Is SOX Compliance?
SOX compliance requires companies to follow the financial reporting, information security and auditing requirements of the Sarbanes-Oxley (SOX) Act of 2002, which aims to prevent corporate fraud.
How Many Companies Go Public Annually in the U.S.?
In 2024, 176 successful IPOs in the United States raised a total of $33 billion with their initial public stock offerings.
The Bottom Line
An initial public offering (IPO) is when a private company offers shares to the public in a new stock issuance. Companies must meet the requirements by exchanges and the Securities and Exchange Commission to hold an IPO.
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