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How To Determine The IPO Valuation Of A Company

Have you ever wondered how companies come up with the price of their initial public offering? Here’s how to determine the IPO valuation of a company.

Did you know that the largest IPO in history was General Motors in 2010 earning 23.1 million?

You might be thinking but how could GM raise that much when they had been bailed out by the US Government in 2008.

Well, the money raised during an Initial Public Offering will depend on the IPO Valuation.

You may be wondering so how is this value determined.

Ready to learn more?


To understand IPO Valuation we have to start with the basics.

What is an IPO?

This is when a private company’s stock is offered to the public for the first time.

For this IPO a complicated process happens that includes filings, prospectus and a ton of big words.

During the process the company has to make many choices including having an independent board of directors. But, at the end of the day this won’t give you an idea of their value.

Unlike trading futures buying an IPO is based on projected value of the company.

Which can be risky but it can be very rewarding as an investor if you play your cards right.

It will all come down to how you analyze the possible outcomes of that first day of trading.

Now How Can I Do My Own IPO Valuation?

If you are lucky enough to have the opportunity to invest in an IPO you’ve to go all in but with the right information on hand.

This means doing your own valuation of the IPO.

This valuation is no different than a company valuation. So you have to leave no stone unturned.

The key here is to analyze but with a capital A.

I know that we are all for don’t judge a book by its cover but in this case question everything and be objective.

To determine the IPO Valuation of a company you have to look at its:

  • Quantitative Character
  • Qualitative Character

Company’s Quantitative Character

The quantitative character of a company translates into hard numbers.

How are the company’s numbers looking vs. equal players in their industry?

The valuation of an IPO will thrive on the market demand for it but using this as a gauge is risky. Because a company’s initial offering can have high demand before the stock is traded but it can flunk once it hits the market. This happened with Facebook’s IPO.

So stick to comparing their actual numbers to the textbook projection from the IPO price and don’t be swayed by the public.

Company’s Qualitative Character

A company’s qualitative character means everything that doesn’t have anything to do with numbers.

Don’t underestimate these factors because they can be even more important than the numbers.

Some of the questions you should ask are:

Does the company have a revolutionary technology that will change the industry?

Do they have an experienced CEO or CFO that has turned around other similar companies?

I recommend taking a step back and looking at everything that makes this company your best bet when investing.

Wrapping It Up

Usually these initial offerings are reserved for certain investors so if you ever get the chance to invest in an IPO go for it. But, always with your eyes wide open and being objective.

Are you or do you know a small business owner looking to take the plunge on the stock market game?

Check our post Invest In Your Future