Issuing stock as a public company provides many benefits for small businesses, like increasing access to capital and improving the brand’s reputation. Advantages exist for founders and startup investors, allowing them to profit from their initial investment. However, going public isn’t without risk and requires business owners to give up some control. In addition, it’s an expensive and time-consuming maneuver.
IPO alternatives can offer similar benefits and are another option for smaller organizations. Find out if your small business is eligible for public status or the steps it’ll take to get there. Here are the details on both options.
Public listing requirements for businesses
At a minimum, your private company must be incorporated. Limited liability companies can’t go public as they do not issue stock or have shareholders. Security exchanges like the New York Stock Exchange or the National Association of Securities Dealers (NASDAQ) have listing standards for all participating companies. And underwriters (investment banks) look for businesses that meet specific criteria before working with them on a public offering.
According to Investopedia, “Some underwriters require revenues of $10 million to $20 million per year with profits of around $1 million.” In addition, you should expect to “show future growth rates of about 25% per year in a five- to seven-year span.”
Investment banks also look for:
- High-quality leadership and management teams.
- Consistent and predictable revenue.
- Funds to pay for the IPO process.
- An industry with room for growth.
- Completed financial audits.
- Organizations leading their sector.
- Low debt-to-equity ratio.
- Robust and transparent business processes.
- A comprehensive business plan with financial forecasts.
[Read more: Employee Stock Options: How Can Your Small Business Offer Them? ]
Offering stock to employees allows you to attract and retain talented workers and managers.
Consider your path to going public
An IPO can be expensive, involves underwriters, and is a lengthy process. However, it’s the traditional method for taking a company public.
Conversely, a direct listing is when a private business lets its current shareholders sell shares to the public. Unlike IPOs, you don’t need underwriters. But the SEC noted that you “may face trading volume challenges.” The third method is through a special purpose acquisition company (SPAC). In this case, a shell business completes an initial public offering and intends to merge or acquire a private organization. The SEC said bigger companies use this approach due to the transaction costs and complexity.
PwC provides an IPO readiness timeline, a cost calculator, and a road map for going public. It recommended that businesses start preparing early “to leverage the right insights to make the right moves at the right times.”
Small business IPO advantages and drawbacks
Entrepreneurs often set their eyes on going public because it gives businesses access to capital from new investors and banks willing to finance publicly owned companies. You can sell bonds (debt) and stock (equity) to expand your reach, product line, and more. Going public also increases brand recognition, resulting in more customers and sales.
Offering stock to employees allows you to attract and retain talented workers and managers. In addition, an IPO enables founders and investors to see a return on their investment. For this reason, many see an initial public offering as an exit plan where they can generate revenue and pass off control of the company.
But there are short- and long-term implications to going public. You must comply with the Securities Exchange Act and exchange listing rules. This involves filing various financial statements regularly, reporting to shareholders, and abiding by many other SEC rules.
In the lead-up to an IPO, company executives will spend significant time generating interest and soliciting investors. Then, there’s the cost. PwC said underwriter fees range from “an average of 3.5% to 7.0% of gross IPO proceeds.”
Additional costs stem from:
- State-specific blue sky fees.
- Legal counsel.
- Auditors.
- Accounting advisors.
- Financial Industry Regulatory Authority (FINRA) fees.
- Printing costs.
- SEC registration fees.
- Initial and ongoing security exchange listing fees.
CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.
CO—is committed to helping you start, run and grow your small business. Learn more about the benefits of small business membership in the U.S. Chamber of Commerce, here.
