What the Hell is an IPO?

By rtrowe |

So you may have been hearing about IPOs recently, or heard about companies “going public” or “going to market”. They have been all the rage for the past few years so it’s likely crossed your path, assuming that is, that you follow the right people, read the news or like to make money. A beginner however, may feel overwhelmed or lost.

If that sounds like you, start here first , then go here. After reading and implementing those 2, you’re now ready for this one. Let’s get into it.

As always, I give the simple version of these things. If you’re an expert and want to delve into the nitty gritty, I’m more than willing to have that conversation. Hit me up on Twitter and we can talk.

For everyone else, here’s the long but simple version.

When a company wants to expand hugely and quickly they have ONE option; get more money. This money can pay for more employees, buy land, buy machinery, upgrade a fleet, buy a bank, whatever. You already know all the things money can do. There are only 2 ways to get this money however:

1. The company can get a loan.

2. The company can sell a piece of itself to someone to raise the money (Kinda like Jamaica and China 🐸☕️).

Both of these options are viable for companies, but they come with their own set of rules. In Jamaica, to get a bank loan as a company you have to jump through quite a few hoops. The comedian Bob Hope once said, “A bank is a place that will lend you money if you can prove you don’t need it”. Many a small business owner might agree with this.

In addition to jumping through the hoops however, after actually getting the loan the bank usually has…lets say…“healthy” interest rates attached to the payback. When you’re running a business on 20% profit margins, a 15% loan might seem like death…however fret not, there is another way as I said before and an IPO is something thats related to the second option.

The Second Option

This option is where the magic happens. The company can sell a piece of itself to someone so that that person (or persons) become part owner(s) of the company. The money they get from that sale, can then be used for whatever they may wish. This of course means that they don’t have to jump through the same hoops that the banks may impose and, even better, they don’t have to pay the money back and avoid exorbitant interest rates. This is the crowdfunding route, which instead of making you beholden to 1 person for a large amount, makes you beholden to many people for small amounts, but goes a much further way. It’s similar to the method Obama used to fund his 1st campaign.

Now, don’t think that this means that you’re getting away scot-free as a company who takes on investors. Going this route means that while you avoid the bank’s hoops, you’re now answerable to these new people who are part owners and get a say in the running of the company. So thats the trade-off, give up a piece of your company, and get the money without bank hoops and interest, or get through the bank’s red tape and pay t̶h̶r̶o̶u̶g̶h̶ ̶t̶h̶e̶ ̶t̶e̶e̶t̶h back with interest…if you get the loan in the 1st place.

Now, a company can do either of these 2 things without “going public”. You can invite just your small group of friends/family to buy into your company, and if they have the money and you guys have an agreement, then great, you’ve taken on new investors. However, “going public” is a specific thing.

“Going public” is another term for having an IPO (IPO, by the way, means “Initial Public Offering”..and yes I waited this long to say that because I know you already googled the term). Going public, or having an IPO means that a company has decided to offer a piece of itself to the general public and be listed on the stock exchange, and ANYONE (yes, including you) can buy in. Now whenever a company decides to list itself publicly, it does have to follow certain rules. Unlike the hoops of the banks however, these rules are meant to keep the general investing public (again, including you) safe. These rules outline the things that companies that want to list have to do. They cover basically 2 things (experts, again remember, this is the SIMPLE VERSION).

Thing 1

These rules tell a company how often to report on what is happening inside the company, and what things have to be in those reports; How much money they got, aka Revenue; how much of that they got to keep, aka Profit; what they spent the rest of the money on, aka Expenses; etc etc etc. These rules have to be adhered to in order to remain a listed company and enjoy those benefits. This allows you, as a new part owner, to know how your company is doing, after it lists. It also allows prospective owners to know if they want to join in and buy shares in a company as they usually include prior year’s financial performance and/or financial projections.

Thing 2

The rules tell a company how it has to approach everyone initially if it wants to become a listed company. Key in that approach is a document called a Prospectus which is made available to everyone. This is like the resume of a company. It’s pretty detailed because it’s a legal document which has to tell you lots of things about the company. Think of it like a document you would want to get on a potential boyfriend or girlfriend. It’s them telling you who they are, what they do to make money, how much of themselves they’re offering for sale (not an attractive quality in a bf/gf), what price they want for that piece, how much they think that piece is worth, how they plan to spend the money you’re gonna give them for that piece, after things go great, how often you’re gonna pay dividends to company owners (which would include you) etc etc etc.

In addition to all of this the prospectus tells you when they plan to start and stop taking offers (Opening and Closing Date); who is the lead broker taking them to market and the steps to follow if you want to buy a piece, which is usually a form in the prospectus to be filled out by prospective buyers (this means you).

Conclusion

So, lets summarize it all. An IPO (Initial Public Offering aka Listing aka “Going Public” aka “going to market”) is when a company decides to list itself on the stock exchange. This is usually followed by a prospectus, which tells the details of the company, the details of the offer and how to participate in it. Simple right? Now you know what an IPO is, get ready to participate in a few as they are usually very profitable for those who do. There is one more term that you are likely to hear a lot about with regards to IPOs, that is “oversubscribed”. This means exactly what you think it does. A company asks for x million, but the offer is so attractive, that they get XXX million in response. When this happens the broker usually divides up the piece that is on offer to the public in a fashion that allows everyone to get a piece. Sometimes it’s not a very big piece if the offer is very popular. What to do in this situation is another article for another time. I’ll write my thoughts and maybe a strategy or 2 in a follow up article.

Hope this was clear and helped everyone to understand what an IPO is. If it wasn’t, lemme hear your complaints here and if it was, you can tell me at the very same place and also share this article with a friend who may want to know.

You can find my articles also over on www.everymickle.com. Come by and give ’em a read.

Until next time!

– RR

    About rtrowe

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