When a company decides to go public and issue shares to the public, it issues an initial public offering (IPO) through a stock exchange. There are certain advantages and disadvantages to going public with an IPO. Companies must weigh the pros and cons of going public through issuing stock and choose the path that's right for the company.
The primary reason most companies go public is to raise additional capital. Unlike debt, companies do not repay capital raised through the issuance of an IPO. This is a major advantage for firms because it allows them to use the additional capital to grow its operations, increase market share and increase profits. In some cases, capital raised though going public helps companies obtain more capital in the future through debt and equity. Going public also allows a company to include stocks as a part of employee and management incentive plans.
When a company acquires another company, it must put up sufficient capital to purchase the company. Businesses use many methods for financing an acquisition, and public stock is one of the most common ways. A company that owns its stock can use its shares as part of a financing package to buy another company. Many major acquisitions are completed with the acquired company receiving equity. In most cases, a public company has greater financial flexibility to make major deals than private companies.
Expense and Time Consuming
A major disadvantage of going public through the sale of an IPO is that it's both time consuming and expensive - the process can take up to two years. During the process, much of the manager’s time is dedicated solely to overseeing the issuance of the company’s stock. Companies must pay substantial fees for filing and acquiring the services of financial and law professionals. Some of the common fees associated with issuing an IPO include the lead underwriter’s commission, legal fees, accounting fees and marketing costs.
Loss of Control
Another disadvantage of issuing an IPO is that the company must answer to its shareholders. When a company issues stocks, the individuals who buy the stock are essentially owners in the company. As the number of owners increase, the management’s control of the company is diluted. Shareholders with significant ownership in a company can vote to replace managers and directors, as well as gain more authority during the decision-making process. The SEC requires public companies to release its financial information to the public. This puts the company at risk of exposing sensitive information to competitors.
- Reference for Business; Going Public; Laurie Collier Hillstrom
- Find Law; Pros and Cons: Going Public; David H. Schwartz
- CFI. “IPO Process.” Accessed July 23, 2020.
- CNBC. “How The IPO Gets Done, Step By Step,” Accessed Oct. 15, 2019.
- The New York Times. “Entry Level: How To check Out an IPO Underwriter,” Accessed Oct. 15, 2019.