How to Calculate IPO
An initial public offering (IPO), sometimes called a flotation, is a sale of a company's securities to the investing public on a stock exchange. The securities, primarily common shares, are being admitted to the exchange's listing, and then can be traded on the stock exchange's floor or on its computer trading system.
Calculating the price of an IPO means determining the price at which the shares would be sold to the investing public.
Find an investment bank that will help you through your initial public offering. The investment bank will help you find the right stock exchange to list on, fulfill all its listing requirements, and negotiate with investors for the price of your shares.
In order to choose the best investment bank for you, contact a number of investment banks and ask them to do presentations on how they would help you in your IPO, making a so-called "beauty parade." During these presentations, you will be able to discover what investment bank will bring you the highest proceeds (price of your shares times the number sold).
Work with your investment bank to get an initial estimate of how much your business is worth. There are three primary ways in which you can value a business. You can look at how much the shares of public companies similar to your firm in size and scope cost. You can deduct the valuation range for your company by analyzing the prices paid for acquisitions of similar companies. You can also get a valuation estimate by determining how much revenue your company will generate in the future (the NPV or net present value analysis).
Choose the stock exchange on which to float your shares and prepare all the necessary documents. Your investment bank will advise you what stock exchange is best for you and how to fulfill its listing requirements.
The main document in any IPO is a prospectus. It is essentially a business plan of your company that also includes information about your IPO, including the type of securities being sold to the investing public and its price (the price at this point is being left blank).
Send your draft prospectus (a finished prospectus but without the price of securities issued) to institutional investors that might be interested in buying shares of your company. Your investment bank will help you conduct "roadshows"--presentations and meetings with interested investors.
Determine the price of your shares at IPO through negotiations involving you, interested investors, your investment bank, and stock exchange representatives. Usually the price is a little lower than your valuation estimates to encourage investors to buy the stock, hoping it will increase in value.
Fill in the price of the shares you will sell at your IPO in your prospectus, and submit it with other documents to the stock exchange and the relevant regulator (Securities and Exchange Commission in the U.S.). Your stock exchange will admit the shares of your company to its listing, and trade in your shares on the stock exchange will commence.