How Businesses Go From Private Ownership to IPO

Being the founder and owner of a business isn’t exactly as simple and straightforward as finding a gap in a market and creating a company to fill it. It involves dealing with a whole lot of intricate details regarding employment, services and, most importantly, financing and funding.

There’s no single way to start and run a business – it all depends on what the company does, how much money the founder has, whether or not there’ external investment, the way in which the company is projected to the rest of the world and what your plans are for the future growth of the business.

So, what are your options if you own a business and want to move forward with it in terms of expansion and financing?

Funding Privately-Owned Startups

Startups tend to begin as privately owned companies, and privately-owned businesses run off bootstrapped funding or venture capital.

If a company is bootstrapping, that means that it’s only using money that is already on hand – revenue that the company has already generated, personal funds or savings of the founders, contributions from close families and friends or money made by selling off assets. Ultimately, funds that don’t come from outside sources.

Businesses funded by means of venture capital (VC), however, are open to taking on investment from external contributors. Venture capitalists specifically look for opportunities to invest their money in promising startups that seem likely to experience considerable growth and success.

Clearly, companies who are willing to take on VC are more likely to be able to bring in large amounts of investment capital than those who are sticking to bootstrapping techniques.

Either way, whether companies opt for bootstrapping or VC, there’s no reason they’d ever have to switch from private to public ownership. If growth is that they want, venture capital can provide plenty of funding if the business has access to the right venture capitalists.

However, that doesn’t mean that there aren’t advantages to public ownership.

What Are the Benefits of Public Ownership? 

Shifting to an IPO will completely change the structure of the business, as well as the owner’s power and control over operations.

But, there’s good reason why so many large and growing companies choose to go in this direction.

• Increased Potential for Raising Capital
• Funding Can Be Used for Merger and Acquisition Transactions
• Gaining Higher Share Valuation
• Owner Spreads the Risk
• Emphasising Public Image
• Reducing Corporate Debt
• Easier to Attract Employees Due to Lower Risk

…and those are just the basics. The advantages of transforming a private company into an IPO are manifold, but they can also depend on the business in question, the owner and more.

How to Go From Private Ownership to Public Ownership 

An Initial Public Offering is when a company that was previously unlisted sells securities, either new or already existing. This means offering them to the public for purchase for the first time.

The IPO process is complex in legal and logistical terms, so there are clear steps that ought to be followed to ensure that everything is done properly, according to the book.

Step 1: Choose an investment bank. The investment bank’s role is to advise the company during hr process and provide regulatory services and more. This choice ought to be based on the bank’s reputation, a previous relationship with it, distribution of investors, industry expertise and more.

Step 2: Conduct Due Diligence. Before trying to put your company up for public ownership, you need to be totally sure that all your affairs are in order. This is done by means of underwriting that is conducted by the investment bank. The investment bank is the underwriter who acts as a kind of mediator between the business and the public who may potentially purchase shares. Underwriting can be done in a few ways, including as a firm commitment, a best efforts agreement, an all-or-none agreement and by means of a syndicate of underwriters.

The responsibility of the underwriter is to write up an engagement letter, a letter of intent, an underwriting agreement, a registration agreement and a red herring agreement.

Step 3: Price Setting: Once diligence is done and everything has been approved by the SEC, the price of the company’s shares are set, alongside the official date of the IPO.

Step 4: Stabilisation: After the shares have hit the market, it’s the responsibility of the underwriter to provide recommendations regarding market stabilisation. This provides an opportunity for imbalances in share prices to be dealt with, and during this period, the underwriter has the power to trade and influence the price for a short period of time until it settles.

Step 5: Transition to Market Competition: Finally, 25 days after the IPO, there’s a shift from controlled disclosures to allowing the market to naturally provide information regarding shares. At the end of the 25-day period, the underwriter can then provide estimations of the projected warning and valuation of the listed company.