IPO Valuation – How to determine IPO’s share price?

In this article, we shall understand initial public offering (IPO), IPO valuation, how an IPO is valued, factors that affect IPO valuation, and IPO valuation approaches.

The process of listing a private firm on one or more public stock markets is known as an IPO or initial public offering. In an IPO, the owner of the company chooses how many shares they wish to sell, and the company’s ownership is diluted. Many investors that take part in IPOs are unaware of the method used to estimate a company’s worth. The recruited investment bank ascertains the value of the firm and its shares before the public issuing of the stock before they are listed on an exchange. In this article, we shall understand initial public offering (IPO), IPO valuation, how an IPO is valued, factors that affect IPO valuation, and IPO valuation approaches.

IPO Valuation

An initial public offering valuation is the method by which an analyst establishes the price at which a company’s shares can be sold to the public. Demand from investors and customers is crucial to the success of an initial public offering. The stock price will rise as a result of increased demand for the company. A number of elements, such as industry comparables, growth expectations, and the company’s story, go into establishing a company’s initial public offering (IPO) valuation in addition to the demand for its shares.

If an IPO is underpriced, there is a long-term likelihood that investors will be able to keep their gains after the listing. On the other hand, if it is overpriced, you won’t make much money after listing. In general, investors favor initial public offerings (IPOs) with strong corporate profiles and market capitalizations. Potential shareholders carefully consider both of these elements before making a choice.

What is an IPO?

Initial Public Offering, or IPO, is the term used when a private firm offers shares for the first time on the stock market. The shares no longer remain secret when the company announces an IPO; instead, all shareholders now jointly own the stock. The general public can purchase shares and acquire a stake in a company for the first time when it conducts an IPO.

Why do companies go through an IPO?

Initial Public Offerings are frequently used by businesses seeking to expand to raise money. The increased capital raised is an IPO’s main benefit. The money raised can be used to expand, finance R&D, pay off debt, and purchase more real estate, machinery, and equipment (PPE). An IPO also raises a company’s profile, which often results in a surge of prospective new clients. A private firm launches an initial public offering for two main causes:

  • To raise money for growth
  • To make up for lost or owed money

How do companies implement the IPO stage?

Hiring a bank or banks to conduct the Initial Public Offering is the first step in the process. Investment banks can collaborate with one taking the lead or work independently. The management team, auditors, accountants, underwriting banks, attorneys, and Securities and Exchange Commission (SEC) professionals are all present at the next meeting to discuss the offering and choose the best time to file. Throughout the entire underwriting process, similar meetings take place

After the meeting, the firm must undergo due diligence to ensure the accuracy of the registration statements. Market due diligence, legal and intellectual property due diligence, and financial and tax due diligence are all tasks to be met by the company.

How does IPO valuation work?

The demand from investors for the company’s stock is crucial to a successful IPO. A greater stock price for the company will result from strong demand. Industry comparables, growth expectations, and a company’s history are a few other elements that affect an IPO valuation in addition to the demand for a company’s shares.

The S-1 Registration Statement is the ultimate outcome of the due diligence. The material in the statement is determined by the valuation report, which contains previous financial statements, critical statistics, a business description, risk factors, and more. After that, in a pre-marketing session, the price range for the IPO is determined based on valuation. The S-1 registration statement is amended accordingly before the final price is fixed. Then Investors will be given shares by the investment banks when the IPO is priced, and trading in the stock will begin.

To get the valuation part done, seeking assistance from the experts would ease your job.

Key terms for IPO valuation

Not every investor conducts thorough research before submitting an application for the IPO, but investing in an IPO based on misleading information or fake news is not the right strategy. Instead, before participating in an IPO, they should thoroughly research a particular company, its fundamentals, history, trends, prior performance, and notable financial statements.

Here are a few significant elements that have an impact on the cost of the shares sold in an IPO:

  • Growth prospects – The anticipated future growth of the company has a significant impact on the IPO pricing. An IPO’s main goal is to raise money to support future growth. The company’s predictions and ability to expand quickly are important factors in determining if an IPO will be a success.
  • Demand – A company’s value may not always increase if its shares are in high demand. The corporation will, however, be valued at a greater level. The method by which an analyst ascertains the fair worth of a company’s shares is known as an IPO valuation. Due to the time of the IPO and market demand, two identical companies may have drastically different IPO valuations. Typically, a firm will only conduct an IPO if they believe there is strong investor interest in its stock.
  • Industry comparables – A further step in the IPO valuation process is the use of industry comparables. The IPO valuation will involve comparing the value multiples assigned to the IPO candidate’s rivals if the field in which it operates has comparable publicly traded companies. Investors will be prepared to spend similarly for a new entrance into the business as they do for existing enterprises, according to the justification.
  • Corporate Narrative – Not all of the elements that go into determining an IPO valuation are numerical. The narrative of a corporation can be just as persuasive as its revenue estimates. A valuation procedure may take into account a company’s potential to transform an industry or be at the forefront of a new business model by producing novel goods or services. The corporations that invented the Internet in the 1990s are a good example of this. Despite the fact that they were not yet making any money, several of them were valued at multiple billions of dollars since they were promoting innovative and intriguing technologies.

What are some factors that affect IPO valuation?

In an IPO valuation, there are a few elements that can influence the cost of your company’s shares. Some of these factors include:

What are some factors that affect IPO valuation?

  • The recent financial performance of the company.
  • Market trends for the shares.
  • Quantity of shares issued by a specific company in an IPO.
  • The potential growth rate of the business.
  • Business strategy of the company.
  • The most recent market value of organizations with stock market listings.

IPO valuation approaches

The IPO valuation process uses a variety of approaches, which calls for a deeper understanding and particularly a great deal of experience. The various IPO valuation techniques used to determine share value include:

  • Absolute valuation – When evaluating a company’s strength and financial condition, the absolute value method is applied. Discounted Cash Flow (DCF) is a tool used in this IPO valuation approach to determine the wealth of the company. However, absolute valuation differs from relative valuation because it uses the time value of money and interest accrual to analyze the company’s wealth. In contrast, relative valuation gauges a company’s wealth by contrasting it with that of its rivals.
  • Relative valuation – In relative valuation, the business’s share price is determined by comparing it to the prices of other comparable businesses. The nearest benchmarks in their industry and the companies that are already listed on stock exchanges are thoroughly examined by the professionals using this IPO valuation process.
  • Discounted cash flow method – Several specialists collaborate to examine projected cash flows, future performance, investments, potential income sources, and more in a discounted cash-based valuation process. This approach requires a lot of effort and comprehension because it bases its conclusions on a study of business performance that must be properly justified.
  • Asset approach – By taking into account the Company’s residual revenue, assets, risk-bearing capacity, debts that must be repaid, and other relevant economic elements, the value is calculated mathematically. Enterprise value plus the value of cash and assets less the value of debt and other liabilities equals the value of equity. In the Asset valuation approach, the merchant banker considers several factors, including business residual revenue, debt situation, net asset worth, and many more.
  • Market approach – Another common way of assessment is the market value approach, which compares the company to others that have sold similarly to it recently. It can be utilized as a part of a closely held corporation’s valuation procedure or to determine the property’s worth. Unlike the other strategies, this only functions if there are a sizable number of businesses of a comparable nature to compare the company to. This method can also be used to determine the value of a security, a business ownership stake, or an intangible asset. Regardless of the asset, the market approach examines the sales of every comparable asset and makes adjustments for any variances in quality, quantity, or size.
  • Income approach – Another popular approach to valuation is the income valuation approach, which is predicated on the notion that a company’s true value lies in its potential to generate income in the future. The most popular way to evaluate an asset under the earning value approach is to capitalize on prior earnings. As one of the traditional methods of valuation, the capitalization of earnings methodology aids investors in assessing the potential risks and returns of purchasing a firm.
  • Price to earning multiple – The market capitalization and annual income of a company are compared in this IPO valuation. The price-to-earnings multiple is computed using the net income of the company to get at the exact worth of the company. The majority of the time, however, this strategy is used when a company has positive and other significant business ties to the same sector and the same growth and capital structure lines.

Get your IPO valuation today with Eqvista!

Before you go into an IPO for your company, it’s a good idea to get a valuation first to determine the right price to set for your company’s shares. If you’re an investor, an IPO valuation can show you a company’s financial position before making any decisions. With Eqvista, you can easily get an IPO valuation and not worry about complex processes. Learn more about our wide range of valuation services and contact us today.

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