Thinking about an IPO? Consider seven steps first.

Your company may be considering an initial public offering. Before contacting an investment bank, you should first consider the preliminary requirements described in this article. They will help you assess whether your company is ready for an IPO.

Compelling reason
There are many valid reasons to take your company public. These include raising a large amount of capital, having publicly traded stock for use in acquisitions, and providing liquidity to shareholders. The benefits of becoming a public company must significantly outweigh the burdens.

Those burdens include public disclosure, compliance with Securities and Exchange Commission, stock exchange and other regulations, public scrutiny, and restrictions on how your company conducts its business.

Predictable revenue
Successful public companies have large and stable revenue. They also have systems in place to accurately predict revenue and profits on quarterly and annual bases. This is crucial for setting expectations within the securities markets and avoiding surprises.

Investors and analysts in the securities markets focus on short-term performance. They interpret a company’s failure to achieve predicted revenue or profits, even by only a few pennies per share, as a negative sign. The result is often a significant decrease in the company’s stock price.

Skilled management team
The management team must have the skills to grow the company in terms of revenue, profitability and other measures, and must also have experience with the requirements of being a public company. CEOs must effectively communicate to a variety of interested groups including shareholders, analysts and business partners.

CFOs must understand public company reporting requirements, including financial disclosures and disclosures about the company’s future operations. The management team must also understand the corporate governance requirements that apply to public companies.

A skilled management team requires experienced and involved directors. Your company’s board of directors should include individuals who currently serve, or who have served in the recent past, as directors of public companies. Experienced directors are important in establishing and implementing corporate governance programs and organizational expectations.

In addition, stock exchanges require that a majority of directors be “independent.” Among other things, independent directors cannot be company employees and cannot be parties to significant transactions or agreements with the company.

Exchange requirements
Listing your company’s shares on a stock exchange means your company must comply with the exchange’s initial listing requirements. Although the New York Stock Exchange, the American Stock Exchange and other regional stock exchanges list shares of public companies, most emerging companies choose to list their shares on the Nasdaq National Market.

To qualify for Nasdaq listing, your company must meet (before or after the offering) one of the three sets of requirements. First, it must have shareholders’ equity of $15 million, income from operations of $1 million and publicly held shares having a market value of $8 million. In the second option, it must have shareholders’ equity of $30 million, a two-year operating history and publicly held shares having a market value of $18 million. Under the third option, it must have revenue of $75 million, market capitalization or total assets of $75 million and publicly held shares having a market value of $20 million.

Meeting the initial listing requirements of an exchange is also important for another reason. In 1996, Congress passed the National Securities Markets Improvement Act, which provides that federal law preempts state regulation of public offerings of issuers whose securities are listed for trading on certain exchanges including the New York Stock Exchange, American Stock Exchange, and the Nasdaq.

Federal preemption has eliminated what was previously an expensive, burdensome and time-consuming endeavor to comply with each state’s securities laws in an IPO.

Corporate governance
The changes required under new legislation make it necessary for public companies to significantly upgrade their corporate governance programs. Companies considering an IPO should begin to implement corporate governance changes at least six months before making initial contact with an investment bank.

This includes establishing audit, compensation and nominating committees, and ensuring that these committees fulfill their proper roles and responsibilities. Transactions with management should be eliminated well before filing for an IPO.

House in order
Before starting the IPO process, you must ensure that your company has taken all required actions and documented all of its past activities. Have the directors and shareholders approved all significant transactions? Has the company documented all approvals and arrangements in the form of minutes and agreements? Has the company adequately protected its intellectual property rights? Make sure all is in order.

Experienced advisers
Your company will need the services of professionals who have been through the IPO process and who understand the requirements of being a public company. At least a year before contacting an investment banker, you should engage auditors and attorneys familiar with public companies and going public.

These professionals will conduct a readiness analysis for your company to identify issues that require attention. Other professionals whose assistance will be required during the IPO process include a public relations firm and a stock transfer agent.

With enhanced corporate governance requirements, significant stock exchange initial listing standards and greater overall scrutiny of public companies, the IPO process has become more of an adventure than ever before. If your company meets the preliminary requirements described in this article, it may be a good candidate for the trip.