In 2022, the global value of initial public offering (IPO) deals was estimated at about $180 billion — 1,671 IPOs were launched worldwide.
A private company’s decision to go public is usually a part of a growth strategy. One of the main reasons why private companies opt for an IPO is the desire to raise working capital to expand their current business.
However, an IPO is an extremely difficult and lengthy process. This article presents the IPO readiness checklist that will help you learn when your company is ready for an IPO and provides nine steps to complete it.
IPO readiness definition
Simply put, IPO readiness speaks about the private company’s preparedness for becoming a publicly-traded company — “going public”.
Therefore, “IPO readiness” refers to a set of factors confirming the company is ready to start the IPO process.
Let’s review those factors and the main stages of the IPO roadmap.
Visible signs that prove a company is ready for an IPO
Your company is probably prepared for the IPO roadshow if it:
- Has enough cash to go through the lengthy IPO process and cover the ongoing compliance costs of remaining a public company
- Has exact objectives it wants to achieve with a successful IPO
- Has flawless corporate governance framework and management controls
- Provides on-time and audit-ready financial reports
- Has a backup plan in case of an IPO failure or delay
- Has a clear vision of future growth and is ready to publicly share it
- Has a large target customer market and perfectly understands it
- Has the right executive team in place
- Has a strong team of advisors to assist the company through the IPO preparation process
- Would not experience a dramatic change after the IPO
How long does IPO readiness take?
Typically, the IPO process takes about 18 and sometimes even up to 24 months. The desire of private companies to go public is an extremely time- and resource-consuming process.
Below, we describe the main stages of the IPO process and what processes each of the stages presupposes.
| Planning (12–24 months prior) | Making the decision to go public Evaluating current operations and resources Reviewing management track records Completing an IPO readiness assessment |
| Preparation(6-12 months prior) | Building external and internal IPO teams Monitoring the market climate Preparing for due diligence Conducting due diligence |
| Execution(1-6 months prior) | Identifying SEC requirements Drafting IPO prospectus Submitting SEC filings Revising SEC comments Initiating pre-IPO placement and roadshow Setting the price and initiating trading |
| Post-IPO | Maintaining reliable corporate governance and consistent reporting Addressing investors’ expectations Managing public relations and building a reputation in the market Optimizing internal processes, systems, and controls |
IPO readiness checklist: 9 steps to take
With this nine-step checklist, you can effectively prepare your business for an IPO and be sure you won’t miss any critical stage.
1. Ensure that going public is right for your business
Though it might be obvious, before taking your company public, you first need to clearly understand why you’re doing this and what benefits it might bring to your business.
You should be sure that your business is able to handle everything and is prepared for what comes with public trading. The latter presupposes company financials in order, the right management team, effective corporate governance, and readiness to manage compliance requirements and liabilities.
Additionally, you must ensure that your company is eligible to qualify as an emerging growth company (ESG).
Moreover, you should have a compelling equity story that is viable to attract potential investors.
2. Build a strong and purpose-driven team
For a successful IPO, you should have a strong team of professionals to facilitate the path to public investors. The following experts will help you complete the IPO readiness assessment:
- Investment bankers. Investment bankers help private companies along their way to going public. They usually assist in conducting due diligence and underwriting. Additionally, they usually act as intermediaries between your organization and potential public investors.
- Attorneys. The legal team will guide you through the legal side of the IPO preparation process. This includes compliance with federal and state regulations, The U.S. Securities and Exchange Commission (SEC) filing, and other legal requirements or possible legal disputes.
- Auditors. The audit and accounting teams review all of the company’s financial statements and financial reporting to make sure everything is in order and in compliance with SEC requirements. It’s worth noting that an internal audit team is futile since, under the SEC laws, unbiased, independent third-party auditors must perform the audit.
- SEC filer. The process of submitting the required SEC filings might be too difficult to understand if you haven’t dealt with it before. That’s why hiring a dedicated specialist is required. A professional SEC filer will assist your company in submitting all the documents so that all the SEC requirements are met correctly.
- Additional service providers. These include all the “behind-the-scenes” professionals or tools that help you along the way to becoming a public company. For instance, virtual data room solutions help to ensure confidential data privacy when sharing it with numerous third parties during IPO preparation and an IPO roadshow.
3. Collect the necessary documents and conduct due diligence
When you have a professional IPO preparation team in place, the due diligence process starts. During due diligence, your company’s documentation is thoroughly reviewed, and discrepancies are resolved.
During due diligence, you need to organize the following documents:
- SOX compliance (Sarbanes-Oxley Act)
- Cash flow statements
- Income statements
- Financial statements
- Balance sheets
- Internal controls
- Information about any legal disputes
- Tax information
- Historical accounting issues
4. Draft the IPO prospectus
After successful due diligence, together with the legal team, you should prepare a prospectus.
| Note: The IPO prospectus is a document that introduces private businesses going through the process of becoming public companies. It’s a first draft registration statement a company is required to present prior to proceeding with an IPO. |
Typically, legal teams help private companies with drafting a prospectus. A document usually includes selected financial data, the company’s business overview, risk factors, the company’s business strategies, and data about management compensation.
5. File an IPO Registration Statement with the SEC
After the prospectus, the official registration process begins. A company must file the registration statement, IPO S-1 form with the SEC. After the SEC filing, SEC has 30 days to review the documents and comments on them (if there are comments). A filing company, on its side, may need to revise the comments and make the required changes until the SEC is satisfied.
6. Submit required applications
After the SEC signs the registration, the company can then proceed with submitting all the required applications to be listed on the stock exchange.
At this stage, underwriters also notify the Financial Industry Regulatory Authority (FINRA) about the anticipated IPO.
7. Initiate the pre-IPO placement and roadshow
Before taking the company on the IPO roadshow, investment bankers usually first present it to potential investors, such as private equity or hedge funds. This stage is called pre-IPO placement and aims to put the company in a favorable position before proceeding with the roadshow.
When the IPO roadshow starts, an investment bank actively promotes the company among prospective investors. This is the moment when investors can buy a company’s shares at a more attractive price before it announces the preferred stock price.
8. Determine the stock’s price for the initial offering
After analyzing market conditions, the company is ready to announce the preferred exchange price. It’s usually affected by the private equity interest, roadshow results, and general market climate.
9. Allocate shares and initiate trading
Once stock pricing is announced, those who purchased shares during a roadshow receive their shares. All the unsold shares are released for public trading.
What are the legal requirements for an IPO?
The IPO process is tedious and requires preparing lots of documentation.
The list below comprises the main documents needed for an IPO:
- Engagement letter. This is a business agreement between a private company going public and investment bankers/underwriters. It describes the expectation and liabilities of both parties, as well as compensation levels.
- Letter of intent. This document states the commitments of underwriters to the private company; an agreement for cooperating and providing all the required information for a successful underwriting process.
- Underwriting Agreement. This is an official agreement between underwriters and private companies that ensures all parties are clear on their responsibilities and roles, aimed at reducing possible conflict.
- Registration Statement. This is Form S-1 — a document through which a private company formally asks the SEC’s permission to go public.
- Red Herring Prospectus. This is a preliminary prospectus filed with the SEC. Unlike the prospectus, Red Herring Prospectus doesn’t contain key details on the security issues, such as the number of offered shares and their preferred price.
To sum up
A private company’s desire to go public isn’t enough to initiate the process. An IPO is time- and resource-consuming and requires many steps to be taken for completion.
A private company is ready for an IPO when it has the right executive team in place, enough cash to cover ongoing expenses, on-time and audit-ready financial reports, a strong team of advisors, and a clear vision of future growth.
The whole IPO process typically takes from 18 to 24 months and has four main stages: planning, preparation, execution, and post-IPO.
