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What Is an Initial Public Offering (IPO)?

An IPO is the process by which a closely held company goes public. This means that the stock of your company will be available for purchase by the general public and will be publicly traded.

Caution: Please be forewarned that this is an extremely complex process, and many of the details are beyond the scope of this discussion. You will need the assistance of numerous professionals, including attorneys, accountants, investment bankers, underwriters, selling agents, and others. Please consult other resources before attempting an IPO.

Should You Go Public?

The ideal public offering candidate is a company with an excellent management team, a great product, a sizable revenue stream with an established track record of revenue growth, and, according the Small Business Administration, annual growth potential of around 20 percent. You should be able to prove that you'll provide a high rate of return on investments and should be willing to risk a substantial amount of money (perhaps $1 million or more) just to fund the IPO process. Most start-up businesses are not ready for a public offering, but there are exceptions. For example, if your product is revolutionary, your management team is experienced with public offerings, you have strong earnings and quarterly growth, and your owners and managers all have clean backgrounds, your business might be ahead of the curve.

What Are The Advantages of an IPO?

Potential to Raise Large Amounts of Capital

Depending on the success of your offering, you can raise huge amounts of capital through an IPO. This capital can then be used to support growth, upgrade equipment and facilities, increase working capital, pay off debt, hire additional staff, and expand research and development.

Attracting Investors May Become Easier

If your offering is successful and the stock performs well, you may find it easier to raise additional capital from public and private investors. The security becomes more attractive to investors because your company has greater liquidity and its value can be more easily determined.

Increased Public Recognition of Company Name

Public offerings can bring prestige, visibility, and increased public recognition to the company and its owners. Local or regional success may spark national interest, increasing your opportunities for expansion.

Business May Be Considered More Creditworthy

Because your bottom line will improve with a successful public offering, you may find that loans are more easily obtained and loan terms more favorable.

Stock Can Be Used as an Incentive

Your customers and employees will have the opportunity to become shareholders in your business. Thus, they may take more of a personal interest in the success of the company, which could improve job performances and sales. In addition, stock options and stock bonuses can be used to attract and retain key employees.

Reduction of Risk Through Dilution of Ownership

Bringing on additional owners reduces the risk of loss for existing owners. Risk is distributed among a greater number of owners, thereby reducing individual chances of loss.

What Are The Disadvantages of an IPO?

High Initial Cost

An IPO is an incredibly expensive endeavor. It could easily cost $1 million or more just to get the offering to market. Initial costs include legal and accounting fees; underwriters' discounts (usually 6 to 10 percent of the offering's gross proceeds); state and federal filing fees; registration fees; printing and mailing costs for registration statements, prospectuses, and stock certificates; and many others.

Enormous Expenditure of Time and Energy

An IPO requires an enormous amount of preparation. The owners and managers of the company will likely need to focus all their attention on the process for several months before the actual offering.

Success of the Offering Is Not Guaranteed

Even after spending hundreds of thousands of dollars (or more), and months of preparation, there is still no guarantee that your offering will be successful. You could have the unpleasant surprise of finding that public interest is weak or even nonexistent.

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Continuing Cost of Running a Public Company

Even if your offering is well received, you will have the continuing expense of operating a public corporation. Ongoing costs include administrative costs, taxes, key person life insurance, and legal fees.

Value Becomes Subject to Outside Influences

Once you become a public corporation, the value of your business will be affected by forces that are completely out of your control, including the economy, inflation, fluctuations in the stock market, business cycles of other industries, and others.

Pressure To Pay Dividends and Maintain Growth

Stockholders may exert pressure on the company to pay dividends, even though this might not be the best course of action for long-term prosperity.

Loss of Control

If a significant portion of the company is sold to the public, you may lose control. Subsequent offerings may further dilute your ownership share, potentially putting you at risk for a takeover.

Loss of Privacy

Once your company is a public corporation, stockholders are entitled to a great deal of information, including sales figures, profits, employee salaries and benefits, and pension information.

Process Is Basically Irreversible

Once you go public, it is nearly impossible to reverse the process. Make sure you have considered all your options before you start down this path.

How Do You Do an IPO?

Don't Try This At Home

IPOs are incredibly complex and technical. There are numerous legal and financial issues that must be addressed before, during, and after an IPO. Failure to comply with regulatory requirements on registration and disclosure can have disastrous consequences, so a team of experts should be hired to guide you through the entire process.

Hire a Competent, Experienced Attorney

Your legal counsel's primary task will be to make sure you are in compliance with all applicable state and federal securities regulations, advise you on any possible registration exemptions, and make sure you follow the proper steps to get your exemptions. Your attorney will also be the coordinator of the entire IPO process. The laws and procedures surrounding an IPO are extremely complex, and only an attorney experienced in this area should be trusted with this responsibility.

Independent Accountants Are Also Necessary

You will need to have your company's financial statements audited by independent accountants. Information from the audit will be included in your offering forms. You should select your accountant and begin involving him or her in the financial life of your business at least two or three years before you plan to go public. The accountant can also help you analyze the financial and tax impact of proposed offering structures.

Choose an Investment Banker to Guide You

Investment bankers and other advisors can help you select the appropriate source and type of capital to finance your IPO, as well as help you select the best time to make your offering.

Underwriters and Selling Agents Round Out The Team

The main responsibility of underwriters and selling agents is to sell shares, although they may also provide a market for after-market resales. In some cases, underwriters may also stabilize the security price at a given level for a short time after the IPO. The underwriters will set the price for the shares after considering a number of factors.

 

 

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

 

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The Retirement Group is a Registered Investment Advisor not affiliated with FSC Securities and may be reached at www.theretirementgroup.com.

 

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