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Table of Contents

Going Public: What It Is and How It Works

By
Mary Hall
Full Bio
Mary Hall is a freelance editor for Investopedia's Advisor Insights, in addition to being the editor of several books and doctoral papers. Mary received her bachelor's in English from Kent State University with a business minor and writing concentration.
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Updated March 28, 2024
Reviewed by Charles Potters
Fact checked by
Hans Daniel Jasperson
Hans Daniel Jasperson
Fact checked by Hans Daniel Jasperson
Full Bio
Hans Daniel Jasperson has over a decade of experience in public policy research, with an emphasis on workforce development, education, and economic justice. His research has been shared with members of the U.S. Congress, federal agencies, and policymakers in several states.
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Going public refers to a private company's initial public offering (IPO), moving to a publicly traded and owned entity. Businesses usually go public to raise capital in hopes of expanding. Additionally, venture capitalists may use IPOs as an exit strategy to reap their investment in a company they've invested in.

Key Takeaways

  • Going public refers to a private company's initial public offering (IPO) and moving to a publicly traded and owned entity.
  • Going public helps a company raise capital to invest in future operations, expansion, or acquisitions.
  • The process may diversify ownership, impose restrictions on management, and open the company to regulatory constraints.

IPO Process

The IPO process begins with an investment bank to determine the number and price of company shares that will be issued. Investment banks complete the underwriting, becoming owners of the shares and assuming legal responsibility for them. The goal of the underwriter is to sell the shares to the public for more than what was paid to the original owners of the company.

Once a privately held company is ready to go public or spinoff a portion of its business into a new public entity, the formal process typically takes six months. The process involves investment bankers, attorneys, and accountants, who work with management to navigate the IPO. 

154

The number of U.S. companies that went public in 2023.

Requirements for Listing

Underwriters commonly require that companies meet the following requirements before going public:

  • The company has predictable and consistent revenue, and the business is mature enough to predict the next quarter and the following year's expected earnings.
  • There is extra cash to fund the IPO process.
  • There is growth potential in the business sector. 
  • The company should be a top player in the industry.
  • A strong management team is in place.
  • Audited financials are a requirement for public companies.
  • Strong business processes are in place.
  • The debt-to-equity ratio should be low. This ratio can be a factor in derailing a successful IPO.
  • The company has a long-term business plan with financials spelled out for the following three to five years.

What Are the Advantages of Going Public?

A company that decides to go public commonly strengthens its capital base, makes acquisitions easier, diversifies ownership, and increases prestige.

What Are the Disadvantages of Going Public?

When a company goes public, it often creates pressure for short-term growth, increases costs, imposes more restrictions on management and trading, forces disclosure to the public, and often strips former business owners of control.

What Types of Companies Underwrite IPOs?

Some of the largest IPOs in the United States have relied on companies such as Morgan Stanley, Credit Suisse, and JP Morgan.

The Bottom Line

The timing of an IPO is crucial to avoid periods where the markets are unfavorable. To help ensure success, a private company should have factors in place before going public, such as a business model with sustainable growth potential and a strong management team.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.

  1. Deloitte. "Private-Owned Company IPOs: Is Timing Everything?"

  2. Stock Analysis. "All 2023 IPOs."

  3. U.S. Securities and Exchange Commission. "Investor Bulletin: Investing in an IPO," Page 4.

  4. Statista. "Underwriters of Largest IPOs in the United States as of August 2023."

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