What Does it Mean When A Company Goes Public?

There are many reasons for going public, but the most common is to raise money for use in growth and expansion. An IPO, or Initial Public Offering, refers to the first time that the shares are made available to the public. A direct listing is when a company goes public without the help of an investment banker. Going public represents a significant step in a company’s growth and success.

When a company’s owners make the decision to go public through an initial public offering, the first thing they do is reach out to an IPO consultant or investment bank regarding underwriting services. Underwriting covers a lot of things, including helping to make decisions about the number and price of shares that will be issued, finding investors to buy the initial shares, and preparing all of the legal documents involved in the process.

Upon being approached about underwriting an IPO, an investment bank will determine whether the private company meets its requirements. At its heart, underwriting means that the bank or investment house is taking on ownership of all of the shares in the company and assuming legal responsibility for them. Since their goal is to make money by purchasing the company’s shares and then immediately selling them to investors for more than what they paid for them, they will carefully examine the company to determine whether it is a good investment based on the answers to several questions:



•  Is the company consistently making money?

•  Is future revenue predictable?

•  Does the company have the cash on hand to fund the IPO process?

•  Does the company have growth potential?

•  How does the company compare to its competitors?

•  How strong is the company’s management team?

•  What is their long-term business plan?



To get the answers to all of these questions, the investment bank will review the company’s financial records to see whether their debt-to-equity ratio is low and what its projected financials are for the next several years. The investment bank wants to know that the company’s owners have already put in the hard work to make the company a success, and this is usually reflected in revenues of at least $10 million per year with profits of at least $1 million per year, and future growth rates of roughly 25% expected over the next several years.



If the company meets the investment bank’s standards, then together with the company’s owners they will move forward with the IPO. Earlier stage companies can complete a direct public offering or direct listing, without an investment banking firm.

The day a company goes public marks a significant step in a company’s prestige and brand awareness. A successful public listing can provide revenue needed to fund growth and expansion, create wealth for employee shareholders, and provide initial investors with a way to liquidate their initial investment.

While considering those benefits, entrepreneurs also need to consider the less attractive aspects of going public, including sharing ownership with new stockholders who may impose restrictions on management decisions and actions. Public companies are also subject to regulation that private companies are not and are required to register with the Securities and Exchange Commission and make quarterly disclosures about the company’s financial health.