An initial public offering (IPO) is an event that completely transforms an organisation’s way of doing business. How do you overcome all difficulties to get there? Would it be the right path for your business?

The secret to success, like with any significant strategic project, is planning. Having a solid strategy in advance can help you ensure that you can own success at every stage. The purpose of this article is to provide a thorough introduction to this topic.

We hope you find this guide helpful and easy to use if you are considering an IPO for your company’s future. For more insights from experienced entrepreneurs, sign up for our EWOR Platform and gain access to over 17 courses and a plethora of resources.

What Does IPO Mean?

IPO is the acronym for an initial public offering, the procedure of issuing new shares of stock to the public for the first time in a private company. In simple terms, it means that corporations get the possibility to raise equity funding from the public.

An organisation is a private corporation before an IPO, since the firm has developed with a limited number of stockholders, including early investors. So, an initial public offering implies the end of one stage in a company’s life cycle and the start of another. This allows the company to raise funds and early investors to withdraw their contributions and reinvest them in another startup.

On their own, many businesses find going public to be a complex and expensive process. Preparation for an IPO involves not only media criticism but also a lot of paperwork and financial reports to comply with the Securities and Exchange Commission’s requirements. 

It’s common for individuals to view initial public offerings as something that has huge financial potential. Well-known companies, when their shares are listed on the market, see their stock prices jump, which attracts media attention. Despite IPOs popularity, you must realise what experienced investors mean by initial public offering, an extremely risky investment with fluctuating returns.

How Do You Incorporate an IPO?

The transition from private to public is a demanding process that requires much effort and time, as well as high costs. Let’s take a deeper look and learn the stages of an IPO.

  1. Select an IPO Underwriter

IPO underwriters are investment banks which provide underwriting services. An IPO’s success depends heavily on the bank that announces the initial offering price and sells the securities to its network investors.

  1. Analyse the Company 

During the investigation process, underwriters and legal counsel seek to understand the risks facing the company.

  1. Submit IPO Documentation

At this stage, the underwriter collects papers like the letter of intent and the Red Herring document.

  1. IPO Roadshow 

Before going public, an underwriting firm and the company’s management team conduct a roadshow to attract investors. This is usually a sales pitch for the upcoming offer.

  1. Set the IPO Price

Depending on how many shares will be offered for sale, underwriters determine what investors are willing to pay for each share.

  1. Release the Initial Shares to the Public Market on the Stock Exchange

At this stage, the initial shares are released for the first time to the public market.

  1. Stabilise the IPO Prices

Stabilising bids involve buying back oversold shares to maintain the price of the newly issued shares and generate extra demand for them. You can use such strategies only for a 25-day quiet period.

  1. Evaluate the Results

After calculating the earnings, the underwriter becomes a consultant.

Fixed-price Offering vs Book-Building Offering

Starting an IPO, a company can choose either the fixed price, the book-building offering or both. But what do they mean, and what are the differences between these two types?

Fixed price meaning: A fixed price offering involves the company going public to set a fixed price for its shares, so investors can’t find out the price before the allocation date.

Unlike book-building issues, investors pay the full amount when they subscribe and don’t know the status of their subscription until the issue closes.

Book building meaning: The company going public offers its shares to investors at a 20% price band, within which they can choose the price they’re willing to pay. The price of the IPO depends on the number of bids received. IPOs that are oversubscribed are priced at the cut-off price, and investors are charged only after the shares are allocated.

What Makes an IPO Unfriendly to Small Businesses?

An initial public sale of your stock to the public can generate enough revenue to cover debts or fund an expansion. However, IPOs have significant downsides, especially for small businesses.

High Costs

Even while the process of becoming public can be time-consuming and expensive, many firms find the benefits to be worth it. But many companies underestimate the cost of going public, which can include the process of filing an IPO, and the cost of continuing to prepare the business for operation as a public company. 

Having a realistic expectation of these costs can improve budgeting, limit surprises, and ensure board alignment. Underwriters typically charge 5% to 7% of proceeds, underpriced shares take another 10% to 15%, and those are just basic costs.

Taking a consumer company with $100M in revenue and less than $250M in deal value, going public costs tend to fall between $9.5M and $13M. About $8M of this amount goes to underwriting, $1.6M – $1.9M to legal fees, $400,000 to accounting fees, and $100,000 to $500,000 to printing costs.

Strict Regulations

You must follow different rules after going public. Several legal obligations and financial reporting standards apply to your business. Additionally, small private businesses often lack executive management with experience in these regulations to handle the paperwork.

An Enormous Amount of Pressure

As a private firm, you have obligations to the other early investors as well as to yourself. When you go public, you can have hundreds of thousands or even a million stockholders who look to you for solutions to their issues.

The Most Pressing Questions About IPOs

What Is the Difference Between Floor Price and Cut-off Price for a Book-Building Issue?

A floor price is the minimum price at which the investors may make bids. Any bid below the floor price will be rejected outright.

An IPO cut-off price is the highest price at which an investor can apply for an IPO. It is determined by an issuer company based on its share demand.

How Long Is an IPO Open?

The issue must be open for at least three working days, but not more than ten. In the current market, a successful bidding process results in a stock’s listing after 6 days. The market regulator is working to reduce it to three days.

What Basis of Allotment Means?

The basis of Allotment or basis of Allocation is a document that specifies the final price determined for the IPO. It also includes information regarding the obligation to subscribe to the issue (auction) or the IPO, and details regarding the ratio of share distribution. The IPO registrar makes it available to stock exchanges and investors. After the closing of the offering, the applications received are categorized, for example, qualified institutional buyers (QIB), non-institutional investors (NII), retail, etc.

How To Delete an IPO Application?

You can withdraw the application up until the end of the bid period. Usually, there is a Delete Order option on the internet portal where the application was previously submitted. It is important to mention that Qualified Institutional Bidders (QIBs) are prohibited from withdrawing their bid after the offer has been accepted. This requirement is there to stop the QIBs from having any kind of control over the IPO membership.

How Soon May an IPO Be Sold?

Trading for IPOs begins when the market opens on the day of the listing. You cannot sell the share before that time. They may only be sold during or following the listing.

Many researchers suggest that you sell your shares on the day of the listing, rather than later on. However, there are many debates on this topic.

Conclusion

As far as you can see, an IPO is a powerful tool to raise capital, to grow your funds or just to create liquidity. However, this process is associated with dozens of risks and requires your undivided attention and good preparation.

These are two sides of the same coin. That’s why it is essential to consider questions like: are you able to keep strong sales and earning growth, or are sustainable investors interested in your company, before going public. 

Don’t forget to take into account other methods of raising capital (such as government grants, angel investors, business loans, etc.) and make your decision only after learning all factors.

In other words, identify your own business’s needs. If you’re still unsure, consider gaining some experience first, or taking advantage of a platform like EWOR. Once you’ve accomplished that, you’re ready to proceed!

About the author
EWOR Team

EWOR is a school conceived by Europe’s top professors, entrepreneurs, and industry leaders. We educate and mentor young innovators to launch successful businesses.

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