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The pros and cons of going public
IPO = Initial Public Offering.Terminology used when a private company attempts to go public.
Of course there are always downsides to becoming publicly owned. However, the upside overshadows the downside to going public in most cases.
The Cons of going public are:
1. Loss of control. To some extent, now that the company is public, it must (usually) abide by the majority stockholders opinions in certain business matters, or may be subject to lawsuits from the shareholders.
2. Disclosure of information. Now anyone can
see what the company's profits/losses are, as well
as almost any other information that could
otherwise be kept "secret" in a public company.3. The new public company often has the burden
of added expense as well as expenses for reporting financials by qualified accountants.4. Estate tax disadvantages. Companies must periodically re-examine their capital structures to
see if they can reduce the amount of financial risk they've taken on, match growth strategies with appropriate financing, lower their financing costs,
and increase the flexibility of financial terms.You may want to ponder these reasons for a bit.
You may even see why companies like Dr. Koop wanted to and did go public. But in the end, lack
of profitability slays all that produce no profit with a
dwindling stock price and sometimes...bankruptcy.
There are many reasons for a company to go public, and many reasons not to as well. While history has revealed that some companies should never have gone public, it can also be difficult to determine if a company SHOULD have gone public.
A crucial ingredient in becoming a successful publicly-traded stock is ...profitability!
If a private company has a history of profitability, or appears that it will become profitable (with an excellent business plan to back it up) in the near future, then it should consider going public for the following reasons:
1. To raise capital for further expansion, development, or for acquiring other companies that are a good "fit" for the company’s business model. Raising capital from investors rather than a high-interest bank loan can save upwards of millions of dollars.
2. The ability to borrow with no personal guarantees.
3. Prestige and competitive position. It helps get the company "noticed" faster, and sets it up for attracting and retaining key personnel that may not be interested in working for a company that does not offer a "piece" of the company.
4. Earning the trust of the community (investor and business).
5. Ability to take advantage of market price fluctuations...buying/selling its own shares of stock to increase the company's worth.
6. Generally, the company's stock receives a higher valuation in a public offering than in a private financing, and usually with fewer strings attached.
7. Reporting requirements can be less burdensome than some restrictive private financing covenants.
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