Going public before selling

Although impractical for most small businesses, another option for an owner of a corporation looking to sell is taking the business public through an Initial Public Offering (IPO). The IPO is the first time that a company’s shares are traded on a public market. An IPO brings profits to initial investors and employees and raises capital for the company.

How going public works

First the company must file a Form S-1 with the U.S. Securities & Exchange Commission (better known as the SEC), which includes basic business and financial information. A group of investment bankers are selected to act as underwriters, who help in raising capital from investors. A public stock exchange such as NASDAQ or NYSE is selected, and a ticker symbol is chosen. Then the company and its underwriters make presentations to investors in major cities, seeking buyers for large blocks of shares. After the SEC has approved the filing, the company and the underwriters set the opening price and numbers of shares that will be sold. The investment capital is transferred to the company and investors get their shares. The next day they begin selling those shares on the public market.

How big should a business be to go public?

Typically, IPOs are not appropriate for companies with less than $100 million in sales. Apart from the significant expense of an IPO, there are other drawbacks. A private company has full control over its shares and is not obligated to disclose key financial information to the public. Shares of publicly traded companies are available to anyone and public companies must answer to those shareholders and also must face significant regulatory oversight. But for fast-growth, innovative companies that rise above their competitors (think Square, Twitter and Dropbox, for example), going public is the next benchmark for success.