An initial public offering (IPO) is a major step for any business. It can lead to growth and working capital, but it is costly and can bring unintended consequences. There are plenty of advantages and disadvantages to consider before taking your company public.
Pros of Taking Your Company Public
1. Generate more capital
Becoming a publicly-traded company can generate more capital through the IPO as well as greater access to capital from the future creation of more shares. That capital can be used to acquire other businesses or be pumped back into the existing company.
2. Encourage employees
Besides more working capital, going public allows you to promise company shares to employees as a way of rewarding them and encouraging them to stay. If your company is doing well, stock options can be a lucrative lure to talented individuals.
3. Free marketing
The IPO process itself can also serve as a marketing tool. Listing on one of the stock exchanges will generate plenty of buzz about your firm. And finally, going public can open doors and help you make connections, as there is a certain prestige associated with being a public company.
Cons Taking Your Company Public
1. Giving up control
Selling equity in your company means giving up some control to your shareholders. This can be a very painful adjustment and may put your business under significant pressure to meet quarterly earnings goals, rather than concentrating on long-term growth. And of course, there is always the potential that some investors could try to wrest majority control away from you.
2. Giving up information
Once you have taken your company public, the number and scope of disclosures will increase. The Securities and Exchange Commission (SEC) requires full disclosure now under the Sarbanes-Oxley Act of 2002. This means giving up information about products and customers as well as about contracts and your firm’s management details.
3. Difficult and costly
All of this can be costly. The IPO process is extremely difficult to navigate for a novice, so be prepared to pay for legal, underwriting and accounting fees, to name a few.
Just because your company can meet the requirements for an IPO doesn’t mean you are ready to make that leap. Making a careful study of the benefits and drawbacks of going public will help you know if your business should move forward with an IPO.