What Is the Financial Meaning of an IPO?

An IPO is a dramatic shift for a business, here's what you can expect.

The Good:

An IPO raises needed capital to help a company grow. It's a payday of sorts to founders and investors who stand to profit. The price of the stock may even go higher between the IPO and the secondary market offering.

There are stories about entrepreneurs becoming millionaires or even billionaires after their companies went public. This isn't the case. The companies that are best prepared to go this route are ones that already have a solid track record and are in an industry that's already the focus of much hype.

The Bad:

It also is neither a cheap step for a company to go through the IPO process nor a solution for every company. If you don't have audited financials for the past few years, you may want to think of another way to raise cash. The same goes if your industry isn't on the fast track to growth. There may just not be enough interest there.

Companies must follow specific steps laid out by the federal government, both by the SEC and under the Sarbanes-Oxley Act of 2002. It can be costly to comply with all the regulations, adding up to possibly $2 million or more. If the initial public offering isn't successful, that may be money lost.

Your company will also inviting more scrutiny by the SEC and shareholders. Competitors can also get information on your company.