The Pros and Cons of Going Public

Going public IPO

If you’re a board member for a large or fast growing company, there may come a time when you and your colleagues will be asked to determine whether that company should “go public.”

Investopedia explains, “Going public refers to a private company’s initial public offering (IPO), thus becoming a publicly traded and owned entity. Businesses usually go public to raise capital in hopes of expanding.”

Companies that decide to go public are not only faced with enormous opportunities to grow their organization, they also have to deal with the downsides or challenges associated with the transition.

According to a survey by The Next Million, these are some of the major challenges of going public:

1) Cost

No, the transition to an IPO is not a cheap one. Investopedia shares, “Lawyers, investment bankers and accountants are required, and often outside consultants must be hired. As much as a year or more may be required to prepare for an IPO.”

Additionally, a poorly timed IPO can end up being extremely detrimental to the company’s financial growth and stability. 

2) Financial Reporting

Taking a company public also makes much of that company’s information and data public. Not only will board members be held to more stringent standards, periodic audits are required and public reporting can bring on scrutiny from shareholders, which sometimes results in shareholder lawsuits.

3) Distractions Caused by the IPO Process

Because the IPO process is a significant undertaking, board members must be aware that putting energy towards going public can take away from efforts elsewhere in the company. Let’s say you serve on the board for a tech company that decides to go public.

If leaders in the company are focused on the IPO process, they may miss opportunities to enhance their product or overlook an up and coming competitor.

4) Investor Appetite

Not every company has masses of followers who are chomping at the bit to own stock. Boards should help their company assess whether or not there will be enough interest in its IPO to make the shift worthwhile.

The Benefits of Going Public

Perhaps your board has determined the company it serves is totally ready to go public. You’ve weighed the cons and found ways to protect the company in hopes that you’ll be able to further growth in a new financial setting. The benefits can be tremendous. They include but are not limited to:

  • The company can raise a lot of cash and FAST. As FindLaw writes, “New capital is raised without the associated risks, restrictions, and costs of debt or the constraints of venture capitalists.”
  • This cash influx helps lower the company’s debt to income ratio and also provides more funds for things like advertising, better compensation packages, and development of new products.
  • Stock options can become a useful tool for attracting senior management personnel.
  • Public companies often have an easier time attracting top tier talent.
  • Going public provides a company with many opportunities for publicity and media coverage.
  • Investopedia shares, “Customers usually have a better perception of companies with a presence on a major stock exchange, another advantage over privately-held companies. This is largely due to the regular audit and financial statement scrutiny that public companies have to undergo on a regular basis.”
  • Publicly traded companies often have more influence when it comes to negotiating with vendors.
  • And so much more!

The decision to go public shouldn’t be made with haste. While the benefits can be vast and exciting for a growing organization, the difficulties could prove too burdensome if the process is poorly timed.

Board members have the duty to evaluate every angle of this transition to ensure it’s the right one for all of the company’s stakeholders.

Posted in General Board Topics, Leadership.