4 Signs a Private Company Is Going Public
When a private company is preparing to go public, there are often subtle indicators that can provide insights into their intentions. While official filings and announcements are required by the Securities and Exchange Commission (SEC), certain actions and changes within the company can signal its plan to make an initial public offering (IPO). This article highlights four signs that indicate a private company is on the path to going public.
1. Corporate Governance Upgrades
Public companies trading on U.S. stock exchanges are subject to the regulations of the Sarbanes-Oxley Act of 2002 (SOX), which establishes standards for corporate governance. These standards include maintaining an external board of directors, implementing effective internal controls over financial management, and establishing a formal process for reporting illegal activities and policy violations. A sudden flurry of new policies and procedures related to corporate governance can be an indication that a private company is preparing for an IPO.
2. “Big Bath” Write-Downs
Private companies considering going public often assess their financial statements and take advantage of allowed write-offs under Generally Accepted Accounting Principles (GAAP). By taking these write-offs all at once, the company can present improved income statements in the future. For example, they may write-down inventory that is unsalable or worth less than the original cost. This proactive approach to cleaning up financial statements can be an indication that the company is preparing for increased scrutiny as a public company.
3. Sudden Changes in Senior Management
When a company plans to go public, it becomes crucial to evaluate the qualifications and experience of its current management team. To attract investors, a public company needs seasoned executives with a track record of leading companies to profitability. If a private company undergoes a significant overhaul of its senior management, it could be a signal that it is aiming to enhance its image and leadership capabilities in preparation for going public.
4. Selling Off Non-Core Business Segments
Private companies often have ancillary business units that are not directly related to their core operations. These non-core segments can complicate the company’s business direction when preparing for an IPO. To present a clear and focused business strategy in the prospectus, the company may choose to sell off these non-essential segments. This streamlining process indicates a commitment to becoming more efficient and aligning with the company’s core objectives.
The Bottom Line
While private companies may keep their plans to go public under wraps until the official filings and announcements, several signs can indicate their intentions. By observing upgrades in corporate governance, significant accounting write-downs, changes in senior management, and divestment of non-core business segments, investors and industry observers can identify potential IPO candidates. These signals provide valuable insights into a private company’s strategic preparations for becoming a publicly traded entity.
Resources for Further Information
Websites and Online Resources:
- Securities and Exchange Commission (SEC) – The official website of the SEC provides comprehensive information on regulations and requirements related to going public and other corporate activities. Link to SEC website
- Nasdaq – The Nasdaq website offers insights and resources on initial public offerings (IPOs) and the process of going public. Link to Nasdaq website
- “Initial Public Offerings: A Practical Guide to Going Public” by Steven Dresner – This book provides a practical guide to the process of going public, including key considerations, legal requirements, and strategies for success. Link to book
- “The IPO Handbook: A Guide for Entrepreneurs, Executives, Directors, and Private Investors” by David Feldman – This comprehensive handbook covers the fundamentals of going public, including legal, financial, and strategic aspects. Link to book
Academic Journals and Research Papers:
- “The Decision to Go Public: Evidence from Privately-Held Firms” by Jay R. Ritter – This research paper analyzes factors influencing the decision of private firms to go public and provides valuable insights into the process. Link to paper
- “Corporate Governance and Initial Public Offerings: An International Perspective” by Rüdiger Fahlenbrach and Robert Prilmeier – This academic paper explores the relationship between corporate governance practices and the decision to go public, offering valuable insights into the governance considerations involved. Link to paper
Reports and Studies:
- Ernst & Young (EY) IPO Center – EY’s IPO Center provides reports, studies, and insights on initial public offerings, including trends, market analysis, and considerations for private companies. Link to EY IPO Center
- PwC Going Public Guide – PwC offers a comprehensive guide on the process of going public, covering key steps, considerations, and insights for private companies. Link to PwC Going Public Guide
Professional Organizations and Associations:
- National Association of Corporate Directors (NACD) – NACD offers resources and insights on corporate governance, including guidance for companies considering going public. Link to NACD website
- Association for Corporate Growth (ACG) – ACG provides a platform for professionals involved in corporate growth, including resources and events related to initial public offerings. Link to ACG website
Note: The provided links are examples and may require further exploration within the respective websites to access specific resources related to going public.