Running your own business is one of the most rewarding things you can do, but it’s far from easy. Sustaining your company requires capital, and sales alone don’t always provide enough. If you’ve found yourself in that situation, you might’ve thought about selling shares in your business on the stock market.
Even if you aren’t short on funds, going public can feel like the next significant step for your company. After all, most, if not all, of the world’s largest, most successful companies are publicly traded. Like anything in the business world, though, you should approach going public with caution and forethought.
Pros of Going Public on the Stock Market
Going public can be beneficial for your company. Most notably, it enables you to raise capital from a wider pool of investors. Companies that offer a needed service or product can make a considerable splash after their initial public offering (IPO).
For example, DoorDash stocks traded at 16 times their revenue soon after its stock market debut. They listed their stocks above their range, and prices skyrocketed after people started trading. Since they had shown impressive growth before their IPO and provided a needed service, they debuted already in demand.
Similarly, Facebook raised $16 billion through their IPO when they went public in 2012. The company had already established itself as a promising up-and-comer before debuting on the stock market. They also had a relatively novel concept and met the needs of an increasingly online world, generating a lot of demand.
Another benefit of going public is that it provides a clear path for succession. You’ll have to eventually transfer ownership of your business, and stock holdings are an excellent way to do that.
Putting your company on the stock market also helps guide your company. It enables you to attract expert investors and board members to give you advice and appeal to the public.
Cons of Going Public on the Stock Market
Of course, there are some potential downsides to going public as well. You could easily overvalue your company in your IPO, scaring investors away. Conversely, the market could undervalue your stock, leading to losses. You’ll need knowledgeable, reliable valuation experts to guide your IPO.
There are other ways to miss the mark on your IPO too. When Vonage went public in 2006, it offered shares directly to customers through a website. Technical issues made buying stocks through the site difficult, leading to a 30% stock price drop in the first week.
You are also subject to more public scrutiny when you’re on the stock market. You’ll have to keep investors happy if you don’t want to lose money.
How to Go Public
If you decide that it’s the right time to go public, you’ll have to follow a few steps first. Before anything else, make sure your company is up to date on industry best practices. For example, 90% of Financial Times Stock Exchange companies depend on the latest ITIL version, so you should too.
When you feel your company is appealing enough for investors, file a Form S-1 with the SEC. This form includes a description of your business, financial statements and risk factors. If the SEC thinks your documentation is inaccurate or misleading, it can reject it, stopping you from going public.
Next, choose the stock exchange you want to list your company on. Different exchanges have varying standards, so make sure you meet the requirements of whichever one you prefer. If you don’t qualify for one exchange, you may be eligible for another.
You should also hire an underwriter to act as an intermediary between you and your investors. Your underwriter will help evaluate your company and determine the risks and rewards for potential investors. They’ll also draft the documents you need for registration and trading.
After you and your underwriter get all of your required documents together, apply to your desired exchange. What documentation you’ll need will vary depending on the market. If you’ve done all of your homework, the exchange will accept you, and you can start selling stock.
Make the Most of Your Company
Going public isn’t right for every company, and even the right company can go public at the wrong time. If you think you’re ready and stand to gain from it, though, it can be a profitable endeavor. With careful planning and a clear roadmap, going public can bring new life into your business.
Selling shares of your company on the stock market can seem intimidating. While it’s certainly not something you want to jump into blindly, it can be an excellent strategic move. Remember these tips, create a path for your future, and grow your business the way you want to.
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