An initial public offering (IPO) is a milestone many business founders and leaders hope to eventually achieve, but the path there can be long and complex. With the many moving parts of IPO preparation — rigorous audit standards, filing timelines, investor presentations and more — it can be difficult to know exactly where to begin. This article outlines the basics of an IPO, including the process stages, benefits and risks, and commonly asked questions.
What Is an IPO?
An IPO is when a private company offers initial shares of its stock for public sale — “going public” — in an effort to raise capital. When a company is not listed on a public stock exchange, the only avenue for raising capital is through private investors. An IPO also presents potential exit opportunities for founders and long-term investors.
What Does It Mean When a Company Goes Public?
The IPO process is complex and requires extensive planning. New organizational structures and operational changes may be implemented to better align with public company requirements. This can include bringing in new leadership with experience at public companies.
Chief executive officers (CEOs) and chief financial officers (CFOs) are critical drivers of the IPO process and must have the right mix of experience, vision and communication skills to successfully lead the company to listing day. Executive leadership plays a critical role in guiding the IPO process, setting the tone for the organization’s approach and ensuring alignment across teams. Additionally, leaders are instrumental in crafting and delivering the company’s pitch to potential investors, which is essential for building confidence and generating interest in the public offering.
Businesses must also prepare for Public Company Accounting Oversight Board (PCAOB) standards and U.S. Securities and Exchange Commission (SEC) regulations to which they were not subject as private companies. The accounting team may require additional support during the IPO process. However, many companies choose not to hire additional full-time finance and accounting staff until after the IPO deal has closed, instead relying on temporary assistance or consulting resources during the transition.
How Does an IPO Work?
Completing an IPO involves numerous stages that typically span from six months to over a year from decision to listing day. Some companies may begin planning and executing the IPO process two years prior to listing, but that is not required. The steps of the IPO process include:
- IPO planning and readiness: This stage focuses on high-level IPO readiness and preparation, such as completing internal assessments and evaluating accounting practices and audit readiness.
- Pre-filing: In this stage, companies start making operational changes and engaging with underwriters to prepare a Form S-1.
- Roadshow, Pricing and Effectiveness: This stage encompasses the final months before going public, when businesses are focused on investor presentations and officially submitting their Form S-1 filings.
Why Do Companies Go Public?
IPOs have many benefits, including easier access to capital and a boost in brand image, both of which can make future growth more attainable. Reasons why business leaders decide to pursue an IPO include:
- Increasing a company’s brand visibility and credibility
- Allowing the company to use publicly traded stock as currency for acquisitions and employee incentives
- Broadening access to a diverse institutional investor base
- Making future capital raises easier and more efficient
- Providing founders and early investors with clearer liquidity and succession planning options
While going public is a major milestone most founders hope to achieve, becoming a public company does have potential disadvantages and is rarely a straightforward process.
Benefits and Risks of Going Public
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Benefits of Going Public |
Risks of Going Public |
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Access to capital to fund growth, acquisitions, research and development (R&D), and debt reduction, with ongoing access via follow-on offerings |
High ongoing costs related to SEC reporting, audits, SOX compliance, legal, IR and D&O insurance |
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Liquidity for shareholders and employees, enabling exits and meaningful equity compensation |
Regulatory and compliance burden, requiring mature finance, legal and control environments |
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Public stock as acquisition currency, supporting larger or more strategic M&A transactions |
Loss of control and flexibility due to dilution, board oversight and potential shareholder activism |
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Increased visibility and credibility with customers, vendors, lenders, and the broader market |
Short-term market pressure from quarterly earnings expectations and stock price volatility |
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Valuation transparency and governance discipline driven by public reporting and oversight |
Mandatory public disclosure that may expose sensitive financial and strategic information |
IPO FAQs
These FAQs cover basic topics and common questions regarding initial public offerings.
An IPO, or “going public,” is when a private company sells its first shares of stock to the public, officially making it a publicly listed company.
The main reasons a company would complete an IPO are to improve its capital base and have access to a broadened pool of investors. Additionally, going public offers founders an exit opportunity and can drive future growth.
A company would choose to pursue an IPO when internal readiness, positive market conditions and investor interest align. Because going public can be a long, complex process, many leaders want to be confident in the company’s internal readiness before completing an IPO. Affordability is another factor, and a company must assess its ability to cover the costs associated with going public.
For a company planning an IPO, audited financial statements are required to be included in the registration statement. Emerging growth companies (EGCs) generally need to provide two years of audited financials, while non-EGCs must present three years. Additionally, EGCs may be exempt from certain requirements, such as auditor attestation on internal controls under Section 404(b) of the Sarbanes-Oxley Act (SOX), whereas non-EGCs must comply with these more rigorous standards.
Form S-1 is the U.S. Securities and Exchange Commission (SEC)’s standard registration statement for domestic companies going public. It outlines financials, share details and potential risks.
Companies can initially file their S-1 registration statement confidentially with the SEC. This approach allows them to address regulator feedback and make revisions away from public scrutiny. The S-1 becomes public at least 15 days before the IPO roadshow or listing, giving investors time to review the details before shares are offered.
“Testing the waters” refers to a company’s process of gauging potential investor interest in a planned IPO before the official registration statement is publicly available. This involves marketing efforts, discussions, and presentations to qualified institutional buyers, and other permitted investors, to determine their appetite for the offering and gather valuable feedback. These communications help companies assess demand and refine their offering strategy ahead of a public launch.
The IPO roadshow is a series of presentations and meetings where company executives and underwriters introduce the business to prospective investors. During the roadshow, management shares key financials, growth stories and strategies, while answering investor questions and building excitement for the offering. The roadshow is vital, as it directly influences investor demand and helps set the final IPO price based on feedback and commitments received.
Fixed-price issue and book-building issue are the two types of IPOs. In a fixed-price issue IPO, a company sets a fixed price for its shares. An underwriter appraises the current value of the company, liabilities and financial aspects. Once the price is set, all investors know the share price before the company is publicly listed.
In a book-building issue, the share price is not fixed, and a price band is determined during the IPO process. The lowest price is the “floor price,” while the highest possible price is the “cap price.” This allows investors to bid for certain quantities of shares at a price they are willing to pay. After analyzing investor bids, shares are given a final issue price.
Your Guide Forward
If you are considering an IPO for your business, Cherry Bekaert’s experienced professionals are here to answer your questions. Our Accounting Advisory Services practice collaborates closely with the CFO Advisory Services team to deliver a knowledgeable, tailored plan for a successful IPO launch.
We help companies assess their readiness and set realistic timelines to prepare and execute their IPOs. Connect with an advisor today to learn more about Cherry Bekaert’s IPO offerings.
