What is an Initial Public Offering (IPO)?
An Initial Public Offering (IPO) is the process by which a private company lists on a stock exchange and offers its shares to the public for the first time. Prior to an IPO a company would typically have a core base of private shareholders and has relatively little demand to reveal its financial performance to external potential investors. An IPO allows the company to raise capital by selling ownership stakes to public investors and create liquidity going forward so that founders and shareholders can trade shares in an open market.
The IPO process involves significant preparation to ensure that the company has prepared suitable accounts and data to meet with scrutiny from external investors. It must also meet the necessary listing requirements of the chosen stock exchange. Decisions will need to be made including deciding how many shares to sell, determining the offer price and planning how to use the proceeds.
Companies seeking to list will require the skills of a corporate finance team to pave the way through financial markets. Part of this role will be to assess the likely success of a planned IPO in the market conditions, ensure that the company has robust financials which tick the criteria boxes of listing and gauge whether there is sufficient demand for the IPO from investors.
This process relies on balancing the level of funding required from an IPO, being able to pay fees, repay debt if needed and then use the new funds to drive growth and profitability within the company.
Download our IPO template from the free resource section to model an IPO scenario with forecasting proceeds of the capital raise.
Open the template and follow these steps to create a successful IPO model.
IPO Template – Key Inputs
- IPO Date: the specific date when the company plans to go public
- Diluted Number of Shares Outstanding (Pre-Money): this represents the total number of shares the company has before the IPO, including potential dilution from convertible securities such as stock options
- Shares Sold in IPO: the number of shares the company plans to sell to the public during the IPO
- IPO Offer Price: the price at which each share will be sold during the IPO
- Fees and Commissions: these are the costs associated with the IPO process, such as underwriting fees, usually expressed as a percentage of the total funds raised
Steps for Using the IPO Template
1. Calculate Sources of Funds
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- Equity Issued: multiply the number of shares sold by the IPO offer price to determine the total funds raised
2. Calculate Uses of Funds
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- Repay Debt: use part of the proceeds to pay off existing debt, focusing on those with higher interest rates
- Cover Underwriting Fees: deduct the underwriting and other associated fees from the funds raised to determine the net proceeds
3. Update Pro-Forma Balance Sheet
- Adjust Cash Balances: reflect the net cash after the IPO, considering the funds raised and used
- Adjust Debt Levels: Update the debt figures based on any repayments made using the IPO proceeds.
- Update Equity: Increase the equity section to account for the new shares issued during the IPO.
IPO Pro-Forma Balance Sheet
This section provides a snapshot of the company’s financial position post-IPO, incorporating the proceeds from the offering, the repayment of debt, and adjustments to equity. For instance:
- Cash: adjusted to reflect the inflow from the IPO minus any uses of funds like debt repayment and fees
- Debt: reduced by the amount of debt repaid using the proceeds from the IPO
- Equity: increased by the amount raised through the issuance of new shares
What You’ll get with the IPO Template
- Structured IPO Planning: The template guides you through each step of preparing for and executing an IPO, ensuring all financial aspects are considered.
- Detailed Financial Adjustments: It helps you calculate and project your post-IPO balance sheet, giving a clear picture of your company’s financial health.
- Comprehensive Financial Management: The template aids in effectively managing the funds raised through the IPO, ensuring they are allocated in a way that supports the company’s strategic goals.
This IPO template provides a robust framework to navigate the complexities of going public, helping you ensure that your company is financially prepared and strategically aligned for a successful IPO.