What Happens When a Private Company Goes Public?

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Going public is an important step for private companies that need to grow. Going public gives a company increased funding and liquidity that it can use to reinvest into current operations or to expand. In a private company, ownership is private, while going public means issuing new shares that will be available to the public at large for purchase, a process called an initial public offering, or IPO. The process is both complicated and time-intensive.

What's the Difference Between a Public and Private Company?

There are hundreds of details that are different when running a public company compared to a private one. One primary difference is that private companies rely on private sources of capital to fund their growth, like friends and family, angel investors, private equity or bank loans. Public companies can issue stock to fund growth. After the IPO, issuing new stock is much less complex.

If the stock price falls after the IPO, the company and those who promoted the stocks can be subject to lawsuits. Private companies can be exposed to lawsuits too, but this is reduced if investors believe all the facts were fully disclosed.

Running a public company is also much more expensive and requires a lot more paperwork. Audits, quarterly reports and proxy costs can exceed $2 million each year. The cost of auditing a private company is much lower.

Disadvantages of Going Public

While the benefits of listing a company on the stock exchange include access to new capital, going public isn't the right decision for all companies. Disadvantages include increased regulations and the paperwork that goes with that. However, the primary disadvantage is the time and expense required. This includes:

  • Underwriting, legal and accounting fees
  • Securities and Exchange Commission (SEC) filing fees
  • Stock exchange listing fees
  • Loss of privacy from required public financial reports
  • Loss of control if other stockholders purchase 50% of shares
  • Increased pressure to perform to keep stockholders satisfied

Before a company can be listed on the New York Stock Exchange, a company usually needs at least $10 million in pre-tax revenue over the past three years, with at least $2 million for each of the past two years. To be listed on Nasdaq, a company needs to earn more than $11 million in the past three years, with more than $2.2 million in each of the past two years.

The Process of Going Public

Once a business owner makes the decision to go public, the process could potentially take as little as three months, however, it almost always takes at least a year. There are a lot of different aspects to the process which need to be synchronized in order for the transition from private to public to be successful.

Choose an underwriter: This should be based on the underwriter's reputation, experience and commitment to your company's success.

Registration statement: Written by the underwriter, this document determines how much money each party will make when the new shares are issued. It also outlines negotiation deals, financial summaries and a business summary.

Cooling Off Period: The company's financial statements are reviewed by accountants and auditors as well as the SEC and the Financial Industry Regulatory Authority (FINRA).

The Road Show: About three weeks before the IPO is issued, the underwriters present the company's prospectus to potential institutional investors. Underwriters can sell shares during this time period, in a process called IPO allocation.

The Tombstone Ad: This is a basic advertisement that announces to the public the new investment opportunity, which can be published one to 10 days before the IPO offering day.

Offering Day: This is the day the private company goes public. The SEC declares the offering official, while the FINRA declares no objections. The independent auditor declares that the company is financially sound. The company executes its underwriting agreement and issues a press release.

References

About the Author

A published author, David Weedmark has advised businesses on technology, media and marketing for more than 20 years and used to teach computer science at Algonquin College. He is currently the owner of Mad Hat Labs, a web design and media consultancy business. David has written hundreds of articles for newspapers, magazines and websites including American Express, Samsung, Re/Max and the New York Times' About.com.

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