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What a Company Needs Before It Goes Public in the Stock Market

What a Company Needs Before It Goes Public in the Stock Market

Companies have similar growth trajectories as compared to that of human development. The company expects to experience growth, and at some point, get an initial public offering (IPO), which is something comparable to getting a driving license for humans. With the IPO, the company expects a higher standard of accountability in all the sectors: financial disclosure, discipline, planning and delivery, strategic direction, and analyst ratings. Most essential companies have gone public, which is expected to happen to even the next-generation companies.

There are many advantages to going public. First, the company will get the chance to provide liquidity for investors and employees, as it will get an M&A currency that would be ideal for acquiring other companies. In addition to that, it will gain stability to get elusive customers and become more resilient if things become problematic. Therefore, the IPO gives founders diverse options to control their destiny.

However, not every company can get an IPO. So, there needs to be some readiness to tackle critical challenges in order to receive one. This article explains some of the things that a company should achieve to go IPO.

The Company Must Achieve Growth

Top-line growth is the best indicator of a healthy and thriving company and is a characteristic that most public investors would look for. Other things that would matter would be the rate of growth and the valuation at the IPO time. It is important to note that when evaluating a company, revenue growth is a significant metric used.

If a company is experiencing a high growth rate, it means that the company is getting new customers to buy their products or existing customers are buying more. It also indicates that there is a reasonable monetization model. Ideal growth would be a revenue growth of above 30% in the forecasted two years.

Scalable Revenue

Growth is not enough for a company to go IOP, but rather scalable growth is ideal. If a company can make a scalable revenue of $100 million, it would attract public investors’ interests. However, there is no clear threshold, and a company can make even more than this.

Cash

A company needs to be making cash to attract public investors; however, a company may want to get an IPO to get access to more resilient capital, which is the irony. What the investors would be looking at is the cash in the balance sheet, and they may also be interested in a company with projections to get enough money to fund its operations. To avoid being seen as a management that is not motivated to self-sustainability, a company should ensure that it can generate cash before it opts for an IPO. The IPO would then provide funds that can be used to drive a higher revenue growth rate and reinforce its balance sheet.

Company Should Show Profitability

The difference between public and private companies lay in their take on profitability. Both are expected to be generating net income on their income statement; however, a company would seek IPO when they haven’t begun to make their profitability as the company gets older.

When measuring profitability, different measures are used depending on the business type and maturity stage. Therefore, public investors would consider the following when a company seeks IPO.

  • Free cash flow
  • Net income
  • EBITDA

Market Opportunity

When a company has a massive market opportunity, it will have a higher chance of attracting public investors. Evidence for a vast, wide-open, and total addressable market is what they are looking for. With TAM, the company can become a massive franchise even if it doesn’t penetrate deep into the market. If the company has a larger market size, it is an indicator that it can sustain higher long-term growth rates.

However, businesses do find qualifying for a broader market to be a challenging task. For TAM, it is not only theoretical but also credible and proven. Therefore, the company can calculate market size by measuring the pre-existing revenue of legacy players. When the company is new, third-party research publications can back up with both bottom-up and top-down analyses. When addressing a large market, financial results can also be used to support the company’s case.


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by Lottie Pritchard // Lottie Pritchard is a contributor to Businessing Magazine.

Opinions expressed by contributors are their own.