Going Public? Here

Taking your company to its initial public offering can be the most important thing you ever do. Don

They say on Wall Street that the best way to get rich is to buy a dollar for 50 cents, over and over again.

That’s the general idea behind initial public offerings – the financial market’s mechanism for buying stocks of newly minted public companies for a low price and selling them down the road – sometimes not too far down the road – at a higher price.

IPOs aren’t as complicated as some might think. By definition, an initial public offering is the process by which a private company turns into a public company. With an IPO, the company makes shares of its stock – known on Wall Street as “equity” – available to investors. Usually, those shares trade on a public exchange, like the New York Stock Exchange or NASDAQ.

Preparing an IPO is similar to rearing a child, experts say.

“A new public issue is actually the culmination of years of hard work, market positioning, rounds of financing and business success – rather like sending a child to college,” says Brendan Dougher, a partner at Florham Park, N.J.-based PricewaterhouseCoopers, which specializes in IPO consulting. “The parents’ job is to prepare Junior well enough to be successful on his or her own. Offering a company to the public is no different.”

There are three key phases in the IPO process:

Phase 1 – Choose a Manager

Companies looking to go public first have to hire a financial advisor (the “underwriter”), usually an investment bank, to run interference and manage the IPO. Some companies prefer bigger investment banks with a track record of navigating successful IPOs to market. Other companies may choose a smaller advisor with a more personal touch.

Either way, your company will spend a lot of time interviewing investment bankers, laying out your company’s rationale for going public and figuring out – with the advisor’s help – what the company will be worth (valuation) on the public market.

Cost is definitely a consideration. While fees vary, most IPO candidates pay up to $1 million for the cadre of financial and legal specialists needed for their IPO.

Time is a factor, too. Ideally, the sooner you start, the better your prospects.

Companies begin the process of staffing their management team up to two years before the IPO in order to maximize its chance of success come D-Day, says Barry O’Connor, of the IPO consulting firm MERC Partners.

Phase 2 – Conduct Your Due Diligence

Now that you’ve picked a financial advisor to manage the IPO process, the serious paperwork begins.

In Phase Two, the investment bank will thoroughly examine your company in an effort to understand it and begin the process of assigning a valuation. Expect a heavy dose of lawyers filing legal documents on your behalf with the Securities and Exchange Commission, the government regulatory body that oversees the public financial markets.

The key document is your company’s prospectus, known in investment banking circles as the S-1 form. Your entire IPO team – bankers, lawyers, accountants and markers – will all have a hand in crafting your prospectus. Speed is just as important as thoroughness here: The SEC will issue a timeline for your prospectus to come due. Once completed, it’s sent to the printer and then to the SEC for review.

Phase 3 – Marketing/Investor Relations

After the SEC approves your prospectus, it’s time for what Wall Street calls “the road show” to begin. In all the financial and legal maneuvering, an IPO essentially boils down to you selling your company to investors.

Company management takes to the streets to sell the IPO to potential stockholders, usually institutional investors with deep pockets (primarily pension funds and mutual-fund money managers). You and your managers can expect to spend up to a month on the road touting your impending IPO.

Expect lots of questions from money managers about company financials – that’s the bread and butter of IPO investing. You’re going to need plenty of brochures, PowerPoint presentations, and other marketing collateral – the glossier and more upbeat, the better.

Your mission is to identify buyers of your stock, both directly and indirectly.

“It’s important going into the IPO process to know where and who the likely investors will be and to focus on them,” says Bill Dickie, president and CEO of Liponex, a Canadian biotech firm that raised $11.5 million in a 2005 IPO.

Conducting research up front will save time in the long run time that could have been lost by promoting the stock to the wrong market, either geographically or in the wrong dollar range. Be aware that some institutional investors won’t even look at companies that have a market cap less than $50 million or $100 million.

Particular focus should be placed on touting your IPO to the Wall Street analyst community. Analysts are the mouthpieces for millions of stock investors, so the more you reach the better.

Studies back that up.

IPOs that are followed closely by many analysts after their offerings tend to do better than those followed by fewer analysts, according to a 2006 study published in the Journal of Finance.

The study compared the IPOs’ performance with how much coverage or attention they subsequently got from stock analysts. It found that after a three years, stock returns of closely watched IPOs were, on average, 10 percent higher than those followed by fewer analysts.

“Based on what we uncovered, analysts are, in some sense, prophets,” says Somnath Das, co-author of the study and professor of accounting at the University of Illinois, in Chicago.

It’s Not Easy Becoming Green – But it’s Doable

Once the road show is over and investors (hopefully) begin lining up to buy your shares, final pricing of your stock begins. That’s the dollar amount determined for one share of the stock come D-Day, when your company goes public and starts trading on a stock exchange. You’ll know your IPO is a runaway hit if the stock price trades up on the first day, generating even more cash for your business.

On the other hand, if your stock sits stagnant or worse, goes into freefall, brace yourself for the wrath of the institutional investors who will dump your stock at the first sign of trouble.

Tips for a Knockout IPO

  • Leave no detail unchecked – always be managing the process.
  • Assemble a great team, including bankers, lawyers, accountants, investor-relations specialists and company executives.
  • Set realistic expectations.
  • Write a great prospectus – senior management must be hands-on.
  • Prepare to meet all regulatory financial checks and deadlines.
  • Create a killer road show by selling your business model.
  • Expect the entire IPO process to take anywhere from six to nine months.

There’s no loyalty on Wall Street – the only thing that matters is green. But take the phases in order and carefully follow this tips, you’ll have a shot at generating more cash than you ever thought possible.

Total
0
Shares
Related Posts
innovative
Read More

The 4 Elements Necessary for Building Innovative Teams

In order to gain traction, earn revenue and turn a brand into a sustainable business, entrepreneurs must innovate. And in order to understand how to build innovative teams, it is important to first understand what...
employee-benefits-jpg
Read More

An Introduction to Employee Benefits

Michael Spath of Kapnick Insurance discusses employee benefits with expert Ian Burt. Here are highlights from that conversation.     Michael: I am Michael Spath. This is Startup Nation Radio, Ask the Expert. I'm filling...
Read More

How to Secure Funding as a Female Business Owner

Raising working capital is a huge part of the job when starting a business. However, many women-owned businesses can run into trouble when looking for financing to fund their small business. When loans and other...