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four Crucial Issues Earlier than Your Firm Goes Public

25, 2021

7 min read

The opinions expressed by the entrepreneur's contributors are their own.

Over the years I've been in situations where I needed to dissuade entrepreneurs from going public. I also watched sadly as some brilliant startups lost heavily in their attempt to go public.

Becoming a public company often brings a seductive prestige that makes entrepreneurs interested in the concept. and while this may indeed be the key to exponential growth for your business, it is not something to go into casually.

Any business decision requires some thorough thought and consideration. However, given the long-term implications of going public and the quick way your business is changing, a little more thought and wisdom is required. Here are some considerations to consider before going public.

Related: Going Public or Remaining Private? What is the right step for you?

Can you afford an IPO?

The IPO process can be very rewarding in the long run, but it is actually expensive and tedious in the short run. An IPO seldom completes in less than a year, and the high cost doesn't show until you are knee-deep.

The registration and accounting processes for the IPO alone range from $ 200,000 to $ 1 million. When you factor in marketing, underwriter (investment bank) percentage, and the cost of preparing your company to operate as a public company, among other things, few IPOs will complete without increasing spending to at least $ 25 million. This still does not take into account the additional cost to the public.

The money question is the first and foremost consideration as it is required to start, complete, and maintain the process, but also important because it is a maturity test. The main reason to go public is to raise capital to expand and to give your investors liquidity. To do this, however, you must first prove yourself financially stable by going public.

If you find that your company can actually afford to go public on its own, it suggests that your company is growing steadily or rapidly and that the final valuation is likely to be favorable to you if stocks are released. This is an indication that an IPO may be a good choice for you.

Is the time to go public?

If your industry as a whole is in crisis, this may not be a good time to go public. An industry slump affects both your valuation and investor confidence. Likewise, if your finances are right and your industry is booming, it would probably be a good time to go public. Take the healthcare industry as an example.

In 2020, the healthcare sector led the industry in terms of startups due to the pandemic. There have been startups in all medical fields and even in related industries like the cannabis industry there have been massive booms, which has resulted in some of them launching successful IPOs.

The most vivid example of a company going public at the right time was Cybin, a Canadian mental health company. Cybin went public in 2020 by raising $ 88 million, despite only launching in 2018, a timeframe that is considerably short for most companies.

However, a big factor in making the solution public so quickly was how relevant and revolutionary its mental health solution was in a year when mental health concerns were at an all-time high due to the pandemic.

Timing is an important key in going public. If you ignore this, you do so at your own risk. You should always keep this in mind; The overall direction of your industry is relevant to the success of your IPO.

Related Topics: To be ready to go public, you need to prepare for these 5 potential pitfalls

Do you have the right leadership team?

In 2019, WeWork had to postpone its first attempt at an IPO because the inflated valuation of itself failed. It was triggered by the realization that the chief executive had been a cause for concern for investors for some time.

His debt has been classified as "NPL" and his liability to property owners has exceeded $ 47 billion. Apparently, venture capital injections had been thrown into the business and an IPO had only been sought as a new investment package, much like Enron had done a few years ago. Enron was previously named "America's Most Innovative Company" by Fortune Magazine.

Any number of entrepreneurs can co-found a private company, but going public is a completely different ball game. Your leadership team and board of directors will be exposed to closer scrutiny and public opinion. In the age of Twitter, this can affect the success of your IPO and the valuation of your company.

It's important that you build a world-class team across your C-suite, and even across your organization, before considering going public.

Do you have experience with public companies in your C-suite? What is your executive team's business record? How is the criminal record? These questions must be answered positively before going public.

Thomas Farey, former NYSE President also suggests that private companies build an investor relations (IR) team and increase their accounting and finance staff before considering going public. Your team is extremely critical to the process in which it can carry out or affect your initial public offering.

How predictable are your finances?

Every business has good times, average times, and bad times. However, your ability to accurately predict your financial performance and achieve your financial goals over a substantial period of time gives your company a relevant index that is necessary to go public. Predictability.

Investors require limited risk before investing. Because of this, going public would require full disclosure of your financial records. For an IPO to be successful, your company must have proven over time that it can predict its financial growth. One focus that you must have as a private company is therefore the development of accurate budgeting and forecasting functions.

An IPO depends on how much space your company still needs and how big your market is. Investors expect their stocks to appreciate, not just move slowly forward. Accurate forecasts show that you are in line with your reality as a company.

The ability to meet or exceed your growth expectations creates a very healthy buzz for your company when it goes public.

If your private company is doing this well, you might not even need an IPO. Prestige comes with a price. However, if you want to make reasonable expansions, invest in research and development, or expand your markets, an IPO might be a good choice, but only if it works.

Going public can make you grow or get exposed, and it all depends on the work you did privately before going public.

Related: 5 Essential Steps To Prepare For An IPO

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