A company getting listed on the stock exchange and offering its shares to the public for the time through an IPO, Initial Public Offering, is a major milestone for the organisation. This takes the company from being a privately owned entity to a public company. While this transformation can bring many advantages with it, there are a fair share of disadvantages that come with it too. You can easily buy IPO shares of any company if you choose a good online trading app to use, but before you get into that process, it is important to understand the pros and cons of a company going public.
Advantages of Going Public
Access to Capital
The primary aspect, and naturally a benefit, of going public is the ability to raise capital from shareholders. A company might need funding for several reasons, including but not limited to expansion, research, settling loans, and acquisitions. It is a great relief to be able to sell shares to the public and raise funds for these purposes.
Increased Public Awareness
A company getting listed puts it in the limelight for sometime, and also increases the number of people that are aware of its existence. People will look into the organization’s data and upon satisfaction might start tracking its performance looking for investment potential. Going public makes a company more popular.
Liquidity for Shareholders
When a company goes for an IPO, it offers liquidity to the shareholders of the company who likely hold huge chunks of the company’s shares. When the shares can be traded in the stock market their personal liquidity rises, giving them an advantage. In addition to liquidity, it could also give them a chance to book profits by selling their shares.
Ability to Attract and Retain Talent
Unlike a private company, a public company can attract employees by offering them stock and giving them ownership in the company. While it is true that even private companies can do that, it is usually reserved for high-profile employees, owing to the nature of ownership. Whereas in a public company, any loyal employee can be offered stocks as part of their compensation.
Disadvantages of Going Public
High Costs
IPOs can be quite costly. It involves many expenses that are inevitable such as paying your underwriters, hiring accountants and legal consultants for the process, and complying with regulations. In addition to the initial cost, the recurring costs that come with being a public company can be daunting as well.
Regulatory Burdens
Unlike private companies, public companies are required to satisfy several regulations that can be quite demanding. The Securities and Exchange Commission, SEC, and other similar entities will scrutinise public companies with a microscopic eye and it can be burdening to the newly listed company that just turned public.
Loss of Control
While the ownership was tight within a few individuals when the company was private, now after going public, the vast number of shareholders now “share” the ownership of the company. This results in the control of prominent shareholders getting diluted. Important decisions require the majority approval of all shareholders, and often meetings are required before executing key decisions.
Market Pressure
Since the public money comes into the organisation, the performance of the company is constantly under monitoring. Public companies are often under immense pressure to keep showing good numbers on their reports since there is always the threat of investors losing confidence and selling shares. A public company doesn’t want to let it share price go down, if it can help it.
Conclusion
The decision to get a company listed on the stock exchange and going public is huge. IPOs can be exciting and appealing to think of, but they come with their own set of bottlenecks. Depending on where the company is financially, it can be a great or bad decision to go for an IPO. The pros are that the company can raise capital freely, become more popular, among other things, while the cons are the expensive IPOs, reduced freedom of action, and the constant scrutiny and pressure from all sides. One has to weigh the pros and cons carefully before making this call.
