Advantages and Disadvantages of a Private Company Going Public
Mostly from article What Are the Advantages and Disadvantages of a Company Going Public?
First watch this short video “The Pros and Cons of A Company Going Public” within the article (advertisement goes away after 15 seconds):
An initial public offering (IPO) is the first sale of stock by a private company, thereby becoming a public corporation.
Private companies wanting to grow their company often use an IPO as a way to generate the capital (investment money) needed to expand.
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Before deciding whether or not to go public through an IPO a private company must evaluate all of the potential advantages and disadvantages.
The decision is usually made during initial talks with the investment bank the company has hired, which receives a consultation fee if the private company declines to become a public corporation.
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The main advantage for the company is as a public corporation it becomes larger and usually more profitable.
The capital raised by an IPO can be used to fund such things as buying factory equipment, research and development, and paying off existing debt.
Becoming public increases public awareness of the company.
IPOs generate publicity making the company and its products better known to the public, including to potential investors and customers.
An IPO also may be used by the company founders to exit their company, sell the company and retire with increased wealth.
Investment banks that manage IPOs can make substantial profits from fees and partial ownership stakes generated.
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The resulting public corporation after an IPO faces several disadvantages.
One is the need for detailed disclosure of revenue and cost data to investors, who are new owners, information kept secret by private companies.
Privately held companies have more autonomy than public ones.
The owners of the private company lose some or all control after becoming a public corporation.
The owners, typically family members, can do whatever they want with their company, often prioritizing comfort and status over profitability.
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An IPO is an expensive and time-consuming endeavor.
To initiate an IPO, the private company must pay for the generation of financial reporting documents, audit fees, investor relations departments, and accounting oversight committees.
These are managed by the investment bank the company has hired to consider and carry out the IPO.
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Public corporations are regulated by the Securities Exchange Act of 1934.
This set requirements for periodic financial reporting, which are difficult and expensive for new public companies.
The Act also set rules and regulations for public corporations monitored and enforced by the Securities and Exchange Commission.
The cost of complying with these regulatory requirements can be very high.
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Public corporations are faced with the added pressure of the public ownership which may cause them to focus more on short-term results rather than long-term growth.
The actions of the company's management become increasingly scrutinized as investors constantly look for increasing profits.
This may lead management to use somewhat questionable practices to boost earnings.
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Becoming a public corporation is not the best choice for most companies, generally the smaller the company the less desirable becoming a public corporation is.
Less than one percent of U.S. firms are public corporations.
About 33 percent of U.S. employees work for public corporations.
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