PostHeaderIcon Going Public: Advantages and Disadvantages

Going public gives companies the chance to reward its investors and attract the needed capital to enable growth. Before deciding to take the company public, there are a number of factors that require careful consideration. The advantages and disadvantages on the management’s part should be weighed to prepare the company for the IPO and to ensure maximum benefits from the process.

The primary advantage that a small business would most likely profit from IPO is access to capital. Capital provided by an IPO is immediately given back to the company, as the only payment that IPO investors usually require is an increase in their investment and possible dividends. There is no need for the capital to be immediately paid back, as there’s also less capital interest. This allows them to use their capital for future needs through new stock or public debt offerings and such expanded capital opportunities.

Another related advantage is that entrepreneurs are able to cash out early in the investment. This is done by selling their equity shares in the open market or as part of IPO. However this may give a bad image to the company, as this indicates that the owners are merely bailing out or jumping ship, thus the IPO would not prove to be a success.

Although there’s really a greater chance for IPOs to increase public awareness for small businesses, leading to new customers and better opportunities. Once they go public, their credibility with the suppliers, customers and lenders is enhanced. Venturing into the IPO process generally gives a perception of success for the company.

Employee compensation, through the offering of shares of stock and stock options, is another benefit for companies going public. Having a public sharing price makes it more convenient for companies to provide employees with a formal stake in the business. This in turn allows employees an incentive to perform well, even becoming part-owners through stock plans to share the success with the company.

Meanwhile, one considerable disadvantage of going public are the costs and time needed in the IPO procedure. The company’s management may be involved in the entire IPO process maybe for as long as two years. Preparation of registration statements, consultations and personal stock marketing are such timely and costly tasks required from the part of the business owner.

IPO really is an expensive undertaking, with almost 15 to 20 percent of resources spent on direct expenses. These include money spent for regulatory actions such as legal services, underwriter commissions, accounting services, printing costs, etc.

There is also a loss of confidentiality and control involved in going public. Public companies are required by SEC regulations to handout all operating details to the public, which may include confidential info about marketing plans, profit margins and the likes.

When employees and competitors are informed of the inner workings of the company, many number of problems may arise. Outsiders can also takeover the company by paying a high price, as going public gives management less control over the business’ operations.


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