Academic journal article Academy of Entrepreneurship Journal

Small Businesses Use of an IPO

Academic journal article Academy of Entrepreneurship Journal

Small Businesses Use of an IPO

Article excerpt

INTRODUCTION

In a country where over 97% of the economy is driven by what is considered in the business world as "small business," these small, privately owned firms are an increasingly valuable and necessary part of our lives. When we think of business, we will likely find that the first thing that comes to mind is that of the large, Fortune 500 companies such as Wal-Mart, Hewlett-Packard, Microsoft, and the like. We often fail to realize that while these large firms have an unmistakable and inescapable presence in the business world, without the small firm, our lives would be vastly different. For example, the smartphone is a growing product in the cellular phone industry, with each brand of phone making use of a large market of applications tailored for that phone, such as Apple's App Store if its iPhone line of phones, or the Android Market for its various Android OS phones. However, it is not the large companies like Apple and AT&T making the majority of the thousands of applications on these markets. Most of the applications that we use on our smartphones everyday are created by independent programmers and small development groups. If you were to remove all the applications from these application markets that were created by "small developers," and only left the applications developed by large firms, the number of applications available for our use would be drastically cut. In this example, we can see how small businesses help to lead the way in innovation and directly impact our lives, whether we realize it or not.

This paper will look at the IPO process through the eyes of both stakeholders in the IPO process: the business putting out its initial public offering, and the public investors who will potentially be buying into the firm. With the firm, the details on how a small business goes through the process of becoming a publicly shared company, when it is recommended that the firm should start considering going public and the options available to the prospective firm will be addressed. Then, the IPO process will be analyzed through the eyes of the investing public, focusing on how an investor or investing group can take part in, and capitalize on, an IPO.

Why an IPO?

In trying economic times, such as the great recession that began in 2008, it can often be difficult for small businesses to stay afloat, or to remain competitive. It is becoming increasingly difficult for small firms to obtain loans from banks in order to start up, continue operations, or expand. Aside from revenue generated through operations and loans from the bank, there are other, less considered options available to small businesses that can help them raise capital. One such option, which will be the focus of this paper, is on the issuance of an initial public offering, or an IPO.

An IPO, as defined by the Securities and Exchange Commission (SEC), is the event in which "a company first sells its shares to the public." An IPO is a firm's transition from a privately owned business into a publically owned and traded business. The capital gained from the sale of shares directly from the company to investors can then be used by the company to grow and expand, or to help cover costs and debts. The capital earned through the selling of initial stock is interest free for the company and does not have to be paid back to another entity in the future, which gives it an advantage over high interest bearing loans that must be eventually repaid to a bank or other debtor. The investor that buys stock in the company will benefit by purchasing partial ownership into the company, thereby giving the investor rights to a share of the company's future profits.

IPOs are becoming a much more lucrative option for small business owners seeking growth a return (refer to Table 1). In the past decade, from 2000 through 2010, IPOs have received an average first day return on offering of 23.4%, significantly above the overall average of 16. …

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