Advantages & Disadvantages of a Business Going Public & Selling Stocks

Taking a company public means registering securities that can be sold to the public rather than to private investors. For many companies, going public confirms their place in the business community and substantiates their hard work. However, going public can lead to financial disaster if your company isn't ready for it. Before making the decision, consider the advantages and disadvantages of going public, including income potential, control issues, and costs. Finally, sit down with an attorney and go over all possible ramifications of taking your company public.

Entrepreneurs take companies public for three major reasons: to raise money, to pass on active control, and to allow themselves freedom to move on to another venture. Public companies sell shares to investors to raise capital for growth and acquisitions without giving up any business control, as they might to venture capitalists, who often require some decision-making status when investing in a private company.

Entrepreneurs who are ready to retire from day-to-day operations but wish to maintain financial control of the company can do so by setting up a board of directors, purchasing controlling interests in stocks, and then stepping back. Similarly, entrepreneurs ready to move on to their next venture keep stocks for continued income, but no longer run the company. This allows them to focus on the new challenge.

Going public gives a company more freedom by providing access to capital without additional debt, increased expansion ability, and better image and credibility. Once your company stabilizes both its worth and growth, your stock price can rise to the point where a public offering is a cheap and quick method to raise money.

Public companies create acquisition deals and mergers through trading stocks rather than by requiring hard cash or property transfer. Going public provides an easy way of determining the value of a company. And it draws the attention of investors and the press, giving the company a more credible standing and public image.

Although going public can be advantageous, it’s important to consider whether your company is ready, and whether your goals are in line with those advantages. Going public requires substantial underwriting fees, sometimes up to 10 percent of the possible income, plus continued costs for annual reporting. Those annual reports decrease confidentiality, because your company’s inner financial workings are available to the public and government agencies.

Finally, consider control issues: Sell too much, and your shareholders get to elect the majority of the board of directors. Even when you maintain control, pressure from shareholders who expect a minimum stock value can move the focus away from your actual business goals.

Before going public, sit down with your board of directors and decide whether your company is ready. First, make sure you have a strong financial history and can bear the cost going public. Second, look at your current profits and make sure you need the additional capital to maintain or increase your current rate of growth.

Third, talk to investment bankers and determine whether one will work with you through the process and underwrite your public offering. Finally, look at your finances and determine whether the financial gains outweigh the ongoing costs of taking the company public.

If you meet all these requirements and you are still happy with the prospect, you are ready to take your company public. Sit down with your banker and start the paperwork.