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IPO Lessons From Pandora

Small companies may go public for several reasons. Some may have shareholders who want to monetize their interests, such as founding partners who want to cash in on a portion or all of their stakes, and some may want to raise money for growth.

Notwithstanding the past few years, and depending on the specific business, small-business owners typically can get a higher value for their company in the public markets than in the private markets, Duran says.

Experts say a company considering the public markets should be sure to have:

  • A minimum of $500 million to $1.5 billion in annual revenue.
  • Two to three quarters of profitability.
  • A compelling growth story, and a compelling reason for investors to buy the firm's stock.
  • A specific reason to want the money and a clear reason on how the money will be used.
  • A IPO deal seeking at least $50 million to $100 million.
  • A seasoned management team, including a chief financial officer experienced at public offerings, and strong board of directors.
  • Underwriters experienced in a firm's specific industry.

Beyond that a company should have "enough investor interest to create interest in the stock," Duran says.

"You need to be large enough and have a sustainable enough revenue stream to take this money to invest in future growth rather than just sustain the business you have. If the business is losing money and has no track for growth, no one will invest," Duran says.

Duran says businesses should not go public if:

  • It is too reliant on any one person.
  • The owner doesn't have a clear understanding of how the money will be invested.
  • There is no clear plan for growth.
  • The owner doesn't understand the increased regulatory environment and is not comfortable having a much more demanding shareholder.
  • The owner doesn't need the money.

Small firms should be prepared for 12 to 18 months of preparation "getting your house in order" before the actual IPO, Duran says, because what might be acceptable as a private company may not be good as a public company.

As far as picking an exchange, for the most part domestic companies should list their stock on a U.S. exchange, despite the fact that non-U.S. exchanges are less regulated.

There's a perception involved: Unless a company does significant business outside the U.S., by listing elsewhere, including on a Canadian exchange or one of the penny exchanges, "what you're saying is that were not good enough to be listed in America," Brenner says.

Picking between NYSE Euronext's (NYX), the New York Stock Exchange or the Nasdaq Stock Market (NDAQ) depends on how much the company is willing to pay for the listing and where competitors are listed.

As the markets return to pre-recession levels, the IPO market is also slowly returning. The IPO market had virtually shut down for a half-year ending in March 2009, and then only large, stable companies were able to successfully take their company public.

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