Chapter 16. Initial Public Offering

The initial public offering (IPO) is considered by many business owners to be the true sign of success—they have grown a business to the point where its revenue volume and profitability are large enough to warrant public ownership. However, the road to an IPO is both expensive and time-consuming and requires significant changes to a company. This chapter describes the pluses and minuses of going public, as well as the steps required and costs to be incurred in order to achieve that goal.

Reasons to Go Public

Though a management team may not say it, a major reason for going public is certainly to create a market for the shares they already own. Though these shares may not be available for sale for some time after the IPO (see the “Restrictions on Stock in a Publicly Traded Company” section), they will eventually be able to cash in their shares and options, potentially generating considerable profits from doing so. This reason is not publicized to the public, since they will be less likely to invest if they think the management team is simply cashing in and then leaving the business.

A slight variation on the wealth creation theme is that, by having a broad public market for their shares, original shareholders are likely to see a rise in the value of their shares even if they have no intention of selling the shares. The reason is that there is no longer a penalty for not having a ready market for the shares, which adds a premium to what the shares ...

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