Many business owners dream of taking their companies public. They imagine the enormous amount of money that their shares could be worth, of course, but many also envision the sense of accomplishment, as well. It’s the American Dream, in a sense: building something with your own bare hands; growing it through untold amounts of blood, sweat, and tears; and making a boatload of a cash while helping others make money through their investments in your company. The process of taking a company public has been dramatized in many movies and TV shows. However, it is important to note that while many positive outcomes can be gained from going public, there are just as many potential negative consequences, especially if a company is already struggling.
An Increase in Capital: Many businesses go public for just this reason. Selling shares in an IPO can raise millions or even billions of dollars, depending on how big your business is. This particular method of raising cash is very attractive to many companies, as it is not a loan and does not need to be paid back.
The Possibility of Raising More Capital: If a business is publicly traded, it has direct access to capital through its shares. Success will lead to the shares being worth more money, which provides the company with funds accordingly. In addition, a company can choose to release more shares in a secondary offering. This is perhaps the best course of action if a company needs to raise money quickly. It is important to note that releasing more shares will likely devalue them due to the law of supply and demand.
Raising Private Funds: An IPO is held for the purpose of raising public funds. However, a publicly traded company generally has an easier time of raising private funds, as well. This is because more information about the company is available to the private investor. Moreover, a company that has successfully gone public inspires confidence in private investors that it will not go bankrupt in the near future.
Reputation and Credibility: A publicly traded company is more recognizable to everyone. This applies to the average person, as well as potential private investors. Publicly traded companies may get free press in investment-related media. As long as a company is doing well, such press is helpful.
The Worth of the Company: As a general rule, a public company is worth more than a private company. This can be lucrative in the event of an acquisition or merger.
The Cost of Going Public: It is easy for business owners to focus on the potential windfall and to lose sight of the costs of going public. Unfortunately, the costs can be considerable. Legal expenses comprise a large portion of this, of course. However, there are several costs that businesses may not anticipate. Companies will have to market the IPO to ensure strong demand for the shares. Companies will also have to hire consultants to provide advice on issues such as the timing and size of the IPO. The expenses, which can pile up very quickly, have led more than one company down the road to bankruptcy.
The Expenditure of Time: Preparing for an IPO is a lengthy procedure, and there are many legal hoops to jump through. Every aspect of the business must be scrutinized to ensure that it’s bulletproof. Shareholders will jump ship if they feel the company is not solid.
The Failure Rate: It is a sobering fact that many companies fail in their attempts at an IPO. This does not necessarily mean that the companies go bankrupt, but a failed IPO is damaging to the business nonetheless.
Legal Obligations: A public company has a legal obligation to keep its shareholders informed. What this means is that shareholders have to know many details of the business’ operations, including information that the company previously kept secret. Shareholders must be informed about profit and loss, expenditures, new business plans, and new PR strategies. This aspect of being a public company is extremely important for two main reasons. First, the company must keep shareholders happy and entice potential shareholders. Second, a public company has many strict laws it must follow.
Loss of Flexibility: Public companies are beholden to their shareholders. The shareholders have a say in how the company is run. This may be a hard pill to swallow for business owners who are accustomed to managing every aspect of their company exactly the way that they would like. However, it is a fact of life for the management of a publicly traded company. Therefore, management must prepare for this change prior to an IPO.
Is an IPO Worth It? Prior to an IPO, it is of paramount importance for the owners of a company to weigh the pros and cons. Owners should solicit multiple opinions and think long and hard about their decision. Going public is not right for every company, especially those that are not financially stable.