When considering an initial public offering (IPO), an organization must be well-prepared and have a realistic understanding of what is involved. By engaging strong outside advisors and aligning expectations, going public, which can be lengthy and expensive, will allow organizations to enjoy the rewards and benefits of being a public company.
An IPO requires continuous engagement by the entire team and support from senior management, which can distract from normal business operations. The most significant financial cost is typically associated with hiring investment bankers to assist and advise in the transaction. The compensation is often a percentage of the proceeds or deal funding and is paid as a ‘success fee,’ so interests are aligned, and capital is not required before the IPO The company must also engage external advisors in accounting, legal, and other fields to assist.
Companies often underestimate the costs associated with going public. These costs can include expenses related to the IPO filing process, the additional costs of operating as a public company, and ongoing expenses necessary to prepare the business to operate as a public company.
Having realistic expectations of the costs can enhance budgeting, reduce surprises and ensure alignment among the management team, board of directors and other key stakeholders.
The Different Types of Costs Involved in an IPO
The costs associated with going public can vary significantly, influenced by several factors, including the complexity of the IPO structure, the size of the company and offering proceeds, and the company’s readiness to operate as a public company. Despite the specific circumstances each private company faces during its transition to a public company, all IPOs share a common characteristic: a significant investment of time and resources. By setting realistic expectations and having a strategic plan, companies can streamline the budgeting process and make it more accurate, minimizing unexpected surprises as they enter the public market. This approach also allows management teams to develop the necessary systems, controls and processes to meet the obligations of being a public company.
While underwriting fees typically represent the largest direct cost incurred during an IPO, legal, accounting and tax expenses are also substantial. They can increase significantly for companies that face additional complexities in preparing for the offering. The types of costs that are disclosed in a company’s IPO prospectus include underwriting, legal, accounting, printing, registration with the US Securities and Exchange Commission (SEC), filing with the Financial Regulatory Authority (FINRA), exchange listing and other miscellaneous costs directly related to the offering.
Common Examples of Costs
Underwriting fee: Investment banks charge underwriting fees when taking a company public. The fees represent the most significant direct cost related to an IPO. According to public filings from 1,300 companies, these costs typically range from 4% to 7% of the total gross proceeds from the IPO.
Legal: External legal counsel and underwriter counsel typically incur costs for the following services:
- Conducting due diligence on the company’s operations, management and business.
- Draft the Form S-1, a required SEC registration statement, and provide related advice for the offering.
- Manage S-1 filings, address SEC comments and responses, and coordinate with the SEC.
- Interactions with the underwriter and their counsel, and handling other matters related to the offering.
- Advice on issues related to going public.
In certain filings, the costs associated with underwriter counsel may be categorized under miscellaneous expenses.
Accounting (Auditors and Advisors): Companies incur accounting costs when working with auditors and accounting advisors. These fees are directly related to the offering and primarily covers the following services:
Auditor Costs:
- Financial statement audit
- Review and consent on SEC filings and amended SEC filings.
- Issuance of Comfort letters.
Advisor Costs:
- Fees from the accounting advisor for addressing technical accounting and financial reporting issues directly associated with the offering.
- Fees for the preparation of the Form S-1.
- Interactions with underwriters, underwriter counsel and external company counsel regarding matters directly related to the offering.
- Advice on non-audit matters specifically related to the offering, such as non-GAAP measures and key performance indicators in the Management’s Discussion and Analysis (MD&A).
SEC Registration: Companies incur costs for SEC registration when filing with the SEC, calculated at $153.10 per $1,000,000 of the total offering amount.
FINRA: Companies must pay FINRA costs when registering with the non-governmental organization that creates and enforces rules for brokers and broker-dealers. These costs are $500 + 0.015% of the proposed maximum aggregate offering amount, with a cap of $225,500. This cap is set to increase to $1,125,000 in July 2025.
Section 7 — Fees for Filing Documents Pursuant to the Corporate Financing Rule | FINRA.org
US Exchange Listing: Companies pay listing fees to trade on stock market exchanges. The two major exchanges in the US charge companies an initial listing fee. The exchanges also charge the ongoing fees.
Regulation: NYSE Listed Company Manual, 902.03, Fees for Listed Equity Securities
Miscellaneous Costs: Miscellaneous fees encompass a variety of costs, including the following:
- Blue sky fees
- Transfer agent fees
- Costs related to the printing of documents, SEC filing and other digital and XBRL support
- Reimbursement of underwriter costs (e.g., roadshow expenses)
- Reimbursement of underwriter counsel costs, if these are not covered by the legal fees mentioned above
Other IPO Costs to Consider
The costs associated with going public often receive most of the attention of management teams and the board of directors. However, the costs required to prepare a business to operate as a public company, and the ongoing costs may be even higher. Many private companies have justifiably focused their historical investments on scaling their business. They typically have delayed investment in the systems, people, processes, and broader infrastructure necessary to operate as a public company. Additionally, public companies incur ongoing costs primarily related to additional regulatory compliance obligations.
Estimating the costs of going public will differ significantly depending on the organization’s existing capabilities and readiness. The complexities of these estimates are further complicated because some costs are one-time, and others are recurring. Generally, organizations need to enhance their teams across several functional areas to meet the demands of operating as a public company. The incremental costs incurred depend on the size and complexity of the company and the expertise of its existing personnel. Recurring costs are typically concentrated in accounting and reporting, legal, tax, internal audit, financial planning and analysis, investor relations and human resources.
System investments are critical to meet the increased reporting requirements associated with being a public company. Costs will likely arise in several areas of an organization, including enterprise resource planning systems, human resources information systems, tax software solutions, contract management systems, and other ancillary software platforms and tools. These costs may be one-time (such as implementation and perpetual software licenses) or recurring (such as cloud-based or term licenses). Beyond system costs, investments in information technology (IT), compliance and cybersecurity will also be required, which may add to the overall costs of being public.
Finally, incremental audit fees and Sarbanes-Oxley Act (SOX) compliance costs comprise many of the costs required to operate as a public company, primarily due to SEC reporting requirements.
The Grassi Difference
What sets Grassi apart is our commitment to transparency and client success. Unlike other firms that may present unexpected costs late in the process, we believe in full disclosure from day one. Our fixed-fee model and approach to solution pricing give our clients confidence that the project will be completed without any surprise fees. Our commitment to transparency and extensive expertise ensure you’ll have the support you need at every step of your IPO journey.
Don’t let uncertainty about IPO costs prevent your organization from reaching its growth potential. Contact Grassi today.
