By Carol TiceThe market for initial public offerings is slowly starting to percolate again, especially for smaller companies, which had been totally shut out of the market for a while there. Going public definitely has its pluses and minuses, especially in this era of zigzagging stock markets, but more companies are starting to consider an IPO.
So far this year, the typical IPO hasn't performed very well, so if you have dreams of a big, instant payday, think again. Going public also brings a large burden of public scrutiny and overhead cost in complying with all the rules the Securities and Exchange Commission has for public companies. But an IPO can provide access to big capital few other vehicles can provide.
If your company is thinking IPO, what are the steps you need to take to get ready? Here's a look at some of the ducks you'll need to get in a row before you're ready to go public:
1. Be big enough, for long enough. Before you can go public, you'll need to demonstrate your company is a going concern with solid revenue and profits. To go public on the NASDAQ Capital Market -- the exchange often used by startups -- you'll need to meet some basic standards. NASDAQ provides four ways to qualify for an IPO. For instance, you can qualify with a total of at least $11 million in pretax earnings over the past three years, with the two most recent years showing at least $2.2 million in income. Another way: you can also qualify with one-year sales of $160 million plus $80 million in capital assets.
2. Get the company shipshape. Prepping for an IPO often involves cleaning up those financial statements to make the company look as good as possible. Assets might be sold to pay off debts, unprofitable divisions could be closed or sold off, or marketing expenses may be cut back to show improved profits.
3. Prepare your financials. No matter what method you use to qualify for your IPO, you'll need at least three years of audited financial statements to go public. Once you've got your company in the best shape possible, hire a crack accountant and prepare your statements.
4. Beef up your management team. In order to make investors entrust their money to your company, it's important to present the strongest possible management team. It's hard to get investors to take a flier on a CEO who's never led a public company before. Often, company founders become chief technology officers or step down to be president or chief operating officer, while a CEO with previous public-company experience is brought in to oversee the IPO drive. It's also not uncommon to hire a chief financial officer with a strong resume at this point. This is sometimes called "professionalizing the management."
5. Comply with the rules. Public companies must obey a complex set of rules known as Sarbanes-Oxley, after the Congressman who first proposed these regulatory reforms. SOx, as it's sometimes known, describes information you must disclose about your company, and sets standards for corporate governance. Often, as companies prepare for IPOs, they find they need to add independent board members in order to have enough independents on all of the required board committees to satisfy SOx.
6. Find market makers. To go public, you'll need at least two sponsoring institutions that agree to buy a substantial block of shares and help you interest investors in the offering. These are known as "market makers." Often, these are investment banks.
7. Prepare your registration statement. Once you've got the revenue, management team and other requirements met, your company has to create a public filing known as an S-1. This filing will describe your company's operations in detail and disclose complete financials for revenue, profits, assets and debts. You will describe what your company plans to use its IPO money for, discuss your competitors and how your company is different, and much more. S-1 filings often run more than 100 pages.
8. Write your prospectus. Also known as the offering documents, your prospectus tells investors the story of your company. Be prepared to quantify your company's market opportunity, and your strategies for growth.
9. Pay the fees. It can cost up to $75,000 in filing fees to go public. You'll pay more for legal advice in preparing your S-1. The first $5,000 portion of the fee is nonrefundable. In addition, you'll usually pay fees to your market makers, as well as granting them options for stock in the IPO.
10. Hit the road. Once you've lined up your market makers and done your filings, it's time to meet with major institutional investors to try to get them excited about your stock. You can really rack up the frequent-flier miles during this phase of the IPO run-up, usually known as the "road show." Road shows can last a few weeks or a few months, depending on how well you do at convincing investors to buy into your IPO. When you feel you've got a critical mass of investors ready to buy shares, you're ready to price your IPO, go public, and move into your business's next phase of life as a public company.
The IPO process can take a few months, a year or more, or never conclude. When there isn't enough investor interest or the market seems unfavorable, IPOs can be called off. Last year, for instance, nearly 50 IPOs were withdrawn, Renaissance Capital reports. In 2008, more than 100 IPOs were withdrawn. This year we're doing better so far -- more than halfway through the year, only 19 IPO filings have been withdrawn.
Are you thinking IPO? Or think those who are thinking IPO right now are crazy? Leave us a comment and share your feelings about going public in 2010.
Photo via Flickr user davidcrow
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