The term going public refers to a closely held company’s initial sale of securities to the general public. To go public, a company must file a registration statement with the Securities and Exchange Board of India.
Numerous factors must be considered in determining whether your company is a candidate for an IPO. Some key considerations are: company size, profitability, shareholder expectations, current stock market conditions, amount of capital to be raised, alternative forms of financing available to achieve your business goals, depth and experience of your management team, the future outlook for your business and the industry in which it operates, a comprehensive cost benefit evaluation and your willingness to allow much greater transparency of your company’s operations.
Advantages of being a public company
Capital for growth
Growth opportunities often require substantial capital, and an IPO is an excellent means of obtaining this capital. An IPO allows a company to raise these additional funds either on an equity basis or on an equity basis combined with additional debt financing obtained from a financial institution or other intermediary. An IPO provides the company with cash to support growth and the related working-capital needs. Access to the public market will continue to be available if your stock performs well. Less dilution The price received for the securities is usually higher in an IPO than through a private placement or other form of financing
The price received for the securities is usually higher in an IPO than through a private placement or other form of financing.
An IPO is an excellent means of positioning your company for future acquisitions. A public company often can use its common shares, either alone or in conjunction with cash or debt, to acquire other companies, which would otherwise require the outlay of significant cash.
Improved ability to borrow
The sale of common stock increases your company’s net shareholders’ equity and improves its debt-to-equity ratio, which can improve your company’s ability to borrow on more favorable terms in the future.
Possible competitive advantages of going public
The publicity the company receives in going public provides name recognition and increased visibility. Although such publicity is usually positive, it should be noted that negative publicity is also a possibility as a result of an IPO.
Customers, suppliers and employees who own stock will have a heightened interest in the company’s success.
An IPO generally results in more passive shareholders than other forms of financing.
Disadvantages of being a public company
The personal “tug-of-war”
In certain closely held businesses, owners are not overly concerned with conflicts resulting from personal-versus business implications of various transactions. However, in a public environment, it is critical to separate personal and business transactions. In fact, most transactions involving personal conflicts must be eliminated from the business either prior to the IPO or upon its completion.
Regulatory rules require a company to disclose a wide array of information, including profitability, financial strength, competitive position, line-of-business and product line information, related-party transactions, executive compensation and fringe benefits. In most cases, this information previously has not been disclosed to anyone, including most employees. In particular, detailed disclosures comparing your company’s executive compensation and performance with other industry members are required. These disclosures often are viewed by privately held companies as a major disadvantage of going public. Some business owners find it unthinkable that their employees, customers, suppliers and competitors, among others, will know their compensation, the nature and amount of related-party transactions and other previously confidential information.
Loss of control
Depending on the size of the IPO and subsequent offerings, a major shareholder might lose absolute voting control of the company. While a major shareholder might still have the largest single block of common stock and thereby still have effective control, that shareholder might be uncomfortable with not owning more than 50 percent or legal control of the outstanding voting common shares.
Public companies usually have a compensation committee that makes recommendations on matters regarding executive compensation. The level of compensation and benefits the company paid as a private company might not be appropriate for a public company
Responsibility to shareholders
Management will have a permanent responsibility to public shareholders, and must take into account the effect on the shareholders when making decisions.
The decision is final
Once you have become a publicly owned company, it is
extremely difficult or impossible to reverse the process.
Therefore, make sure this is the road you wish to travel before
completing this course of action.
Many times, the company will have to modify its corporate bylaws and/or charter to complete an IPO. In addition, all corporate records will have to be brought up to date to pass due diligence by the underwriter.