Going Public

Updated on April 4, 2024
Article byWallstreetmojo Team
Edited byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

Meaning Of Going Public

Going public is a corporate practice in which an unlisted, private company allows the public to purchase its old or new stock for the first time. This initial public offering (IPO) helps the general public to make a profit while assisting the corporation in raising capital and becoming a publicly traded firm.

Retail and institutional investors can become shareholders in the company going public and receive guaranteed dividendsDividendsDividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the company’s equity.read more. If the company makes a profit, so do the shareholders based on the number of shares they own, or vice-versa. Even though it seems a money-making opportunity, IPO is also known for producing lower-than-expected long-term returns.

Going Public

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Going Public (wallstreetmojo.com)

Key Takeaways

  • Going public is a method of allowing the general public to own a portion of a private corporation by purchasing its first issue of shares at a pre-determined price.
  • The corporation becomes a public company after the process completes. And investors can become shareholders in a public listed company and receive assured dividends.
  • Going public company needs to contact an investment bank for business evaluation, advise on the share price, arrange and underwrite the IPO.
  • As per the going public definition, a company receives a considerable amount of liquidity for different operations. But IPO comes at the expense of the company owners losing the company ownership to the shareholders.

How Does Going Public Work?

Going public is crucial for any business, especially a small or privately held one, that requires funding to expand and finance its various projects. And, via an IPOIPOAn initial public offering (IPO) occurs when a private company makes its shares available to the general public for the first time. IPO is a means of raising capital for companies by allowing them to trade their shares on the stock exchange.read more, they can raise the needed capital from new investors while also giving them part-ownership in the business. It is an invitation to the general public to purchase the company’s stock at a pre-fixed price. Aside from that, a private shareholder’s decision to sell its shares may be a factor in a company’s decision to go public.

Going Public Process

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Going Public (wallstreetmojo.com)

The process of going public is governed by the rules of the jurisdiction in which it occurs. It also has to be publicized, giving the public enough opportunity to participate in the IPO. It could range from a few weeks to several months. Companies that are appealing to investors have a target amount in mind when going public. And investors are more likely to make deals with companies that are considered to perform exceptionally well. However, in certain instances, this number is not made available to the public.

When a company performs well, it always sells more shares than it had planned. A variety of steps can alleviate this, including restricting the number of shares that each person can purchase. Putting a cap on the number of shares that a group can apply ensures that the company will not go public with just a few shareholdersShareholdersA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company's total shares.read more. Since the amount shareholders can purchase is restricted, the company ends up with more and more shareholders.

Once the IPO is completed and the shares are purchased, the company is listed on the stock exchangeStock ExchangeStock exchange refers to a market that facilitates the buying and selling of listed securities such as public company stocks, exchange-traded funds, debt instruments, options, etc., as per the standard regulations and guidelines—for instance, NYSE and NASDAQ.read more. The share price would rise if the business is undervalued, resulting in gains for the shareholders. However, if the shares are overvalued, their value can fall before going up again in the future.

Financial Modeling & Valuation Courses Bundle (25+ Hours Video Series)

–>> If you want to learn Financial Modeling & Valuation professionally , then do check this ​Financial Modeling & Valuation Course Bundle​ (25+ hours of video tutorials with step by step McDonald’s Financial Model). Unlock the art of financial modeling and valuation with a comprehensive course covering McDonald’s forecast methodologies, advanced valuation techniques, and financial statements.

Steps Involved In Going Public

To offer an IPO, a company must conduct due diligenceDue DiligenceDue diligence is a thorough examination of information and strict adherence to the applicable rules and regulations. It ensures asset protection as well as the avoidance of malpractices and conflicts.read more on several factors, including past performance, financial condition, and goals. It may also include auditing the business so that prospective investors can determine how much the company is worth before purchasing stock. Cash flowCash FlowCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. read more, assets, liabilities, and plans can all be included to provide a clear picture of the company’s current state.

Steps of Going Public Process

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Going Public (wallstreetmojo.com)

Experts such as managers, securities lawyers, auditorsAuditorsAn auditor is a professional appointed by an enterprise for an independent analysis of their accounting records and financial statements. An auditor issues a report about the accuracy and reliability of financial statements based on the country's local operating laws.read more, and accountants would be required during the going public planning phase. They draft the prospectus and determine the optimal number of shares and the initial rate to sell to the public. Some companies often allow their employees to purchase stock before going public. It gives them a reason to work toward retaining or raising the value of the company’s stock. While the US Securities and Exchange Commission reviews the company going public, the US Treasury Department scrutinizes the firm that has gone public.

Purchasing stock from a newly public company can necessitate the creation of a separate investment bank account. Although a broker may assist the investor in purchasing the shares, broker’s fees may make the cost of going public stock more expensive.

Example

The owners of a telecommunications company decide to going public to raise funds for expansion or other business-related activities. To do this, they must conduct a comprehensive audit of their books internally. They can also ask a third party that is not associated with the company to do the audit.

The company then approaches an investment bankInvestment BankInvestment banking is a specialized banking stream that facilitates the business entities, government and other organizations in generating capital through debts and equity, reorganization, mergers and acquisition, etc.read more and the regulatory body controlling the country’s stock market. It then issues a letter of intentLetter Of IntentA letter of intent, also known as LOI, is a preliminary contract containing key terms of a prospective business deal between two or more parties. It is common in business transactions, for example, the sale, purchase, merger, or formation of a joint venture. read more. The investment bank will take on the role of the underwriterUnderwriterThe underwriters take the financial risk of their client in return of a financial fee. Market Makers like financial institution and large banks ensure that there is enough amount of liquidity in the market by ensuring that enough trading volume is there.read more. Until selling the securities to the general public, the investment bank will own them and assume legal responsibility for them.

The investment bank will help the company figure out how many shares to sell and at what price. It then sells shares to the general public for a price higher than the company’s original owners received. Usually, the company and the bank prefer to underprice the shares to attract investors.

Once due diligence has been completed and found to be satisfactory, shares are offered for sale to the general public. The business will be able to go public after all legal requirements have been fulfilled. Advertisements in the media can assist in the process.

Advantages

  • Going public is a way to get a lot of money in a limited period, given the IPO and subsequent listing performs strategically.
  • It brings higher market value and increases reputation and recognition of the company.
  • The capital can be used to fund operations, acquire other businesses, or grow the company.
  • It diversifies the company’s ownership, protecting the original owners from losses.
  • It simplifies activities requiring significant amounts of money, such as buying out the competition or implementing a strategic plan.

Disadvantages

Frequently Asked Questions (FAQs)

What does going public mean?

Going public is a business activity in which an unlisted firm makes its existing or new stock available to the public for the first time. This initial public offering (IPO) allows the general public to profit while also helping the company raise funds and become a publicly listed company. Investors become shareholders in the public traded company and receive guaranteed dividends.

What are the steps of going public process?

The going public company involves several steps:
1. Perform due diligence on the company’s past performance, financial situation, and objectives
2. Conduct a business audit
3. Assess cash flow, assets, liabilities, and plans
4. Decide the target amount to go public
5. Connect with a securities lawyer, accounting firm, or investment bank

How does going public help a company?

Going public is critical for any company, especially one that is small or privately held that needs money to expand and fund its many activities. It helps the company raise the required funds from new investors through an IPO and become a publicly traded company. It protects the original owners from losses by diversifying the company’s ownership. Also, it makes buying out competitors much easier.

This has been a guide to what is Going Public and it’s meaning. Here we discuss how does it work along with its examples, advantages, and disadvantages. You may also have a look at the following articles to learn more –

Reader Interactions

Leave a Reply

Your email address will not be published. Required fields are marked *