An initial public offering (IPO) is the first sale of the company’s shares to the public. Small companies that are looking to further their growth often use IPO as a way to generate the capital needed to expand.
Although further expansion is beneficial for the company, going public comes with its own set of advantages and disadvantages. Let’s take a look at them.
The most obvious advantage of an IPO is the money. These funds can contribute to the growth of the company in countless ways. The company may use the IPO offering to finance research and development, onboard new employees, develop infrastructure, reduce debt, or even buy other companies. Without a doubt, the money provided by an IPO is consequential and can transform the growth trajectory of the company.
Every company comprises of stakeholders that have contributed significant amounts of time, money, and resources to result in the success of the company. Very often, these founders and investors go for years without seeing any significant and profitable exit strategy for stakeholders.
An IPO can signify a large influx of capital and a good exit strategy for stakeholders. IPOs can often raise nearly $100 million (or even more), which makes them a lucrative opportunity to founders and investors. However, one must note that in order for stakeholders to receive liquidity from an IPO they will have to sell their shares of the now public company on a secondary exchange. Also, they will not immediately receive liquidity from the proceeds of the IPO.
If a company aspires to make it big, it will need to be in the public eye and earn its trust. An IPO is a good way to provide this exposure for the company. Analysts from across the world report on every IPO to keep investors informed when making decisions. The media too picks up on IPO listings and further facilitates the process of giving a company the credibility it requires.
To complete an offering, a company must go through intense scrutiny to ensure that what they report about themselves is true. This scrutiny, combined with people’s tendencies to trust public companies more, can lead to increased credibility for a company and its products.
Regulatory Requirements And Disclosures
Unlike private companies, public companies are required to file their financial statements with the Securities and Exchange Commission (SEC) every year. These documents must be prepared in accordance with the United States Generally Accepted Accounting Principles and audited by a certified public accounting firm.
These SEC regulations can become a tedious and costly affair. Reporting a company’s financial status publicly requires that the company establish more stringent financial controls, hire a financial reporting team and audit committee, implement quarterly and yearly financial close processes, and more such laborious tasks.
Potential Loss Of Control
One of the biggest disadvantages of an IPO is that its founders may lose control of their company. While there are ways to ensure that the founders retain the majority power in making decisions, once the company is public, the leadership focuses on keeping the public happy even if it means taking the voting power away from other shareholders.
An IPO may or may not be the right direction for your company. If you are considering an IPO, weigh all the pros and cons, be patient, and consider all of your alternatives before making a final decision.