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Going public is an exciting and possibly beneficial process for a company. If you’re interested in going public, then you might want to know about the pros and cons of the move. This piece will elaborate on the IPO process and look at the advantages and disadvantages of going public.
Why Do Companies Go Public?
When companies start, they get funding from their private reserves or private investors. But due to the competitive business environment, companies may have to offer part of the ownership to the public. In doing so, companies get funding for marketing, expansion and other business-related activities.
A company goes public when it decides to sell its stocks to outside investors. When a company goes public it must abide by stringent regulations set by the SEC (Securities Exchange Commission). Going public is, however, a lengthy process and is not as simple as it sounds.
The IPO Definition
IPO is the abbreviation of Initial Public Offering. It is the process where companies sell stocks to outside investors and become public. The company then proceeds to sell shares and raise funds to facilitate its development strategies.
The IPO Process
The IPO process is loosely monitored and regulated by strict guidelines. The IPO process consists of five key steps.
Step 1- Finding a Lead Investment bank
Six months before the IPO, a company settles for an investment bank. Companies are likely to select a bank with a proven track record and extensive research capabilities. The bank also gains from being a company’s investment bank.
Banks submit applications to a company to handle its IPO process. It is the bank’s responsibility to compile a good batch of buyers. In return, the bank may charge a fee for the IPO process. This fee is usually a percentage of the IPO total sales.
These buyers range from banks, institutions to individuals.
The process through which banks handle an IPO is called underwriting. The underwriting process entails the following
- Stipulates the amount of money required for the IPO process
- Types of securities involved
- All the fees the bank charges for the IPO
Underwriting ensures the success of the IPO process and every share sell at a specific price.
Step 2- Mandatory Filings and Due Diligence
Three months before the IPO, a comprehensive exercise takes place. This second step involves company executives, accountants, lawyers and representatives from the bank. This step usually needs all members of the IPO team.
The IPO team then gathers all the information needed for the IPO process. The process involves streamlining company operations and eliminating any loopholes that may be detrimental to the company.
In doing so, they ensure the company is attractive to prospective stockholders and shareholders. Many people wouldn’t dare invest in a shaky company.
The investment bank will then file the s1 registration statement. This statement includes all necessary company information. Some of the information may include legal documents, financial statements, and details of the management.
After the banks submit this statement, the SEC will investigate to confirm the veracity of the submitted documents.
Step 3- The Pricing of the IPO
The pricing of the IPO will depend on several factors. The value of the company is one crucial factor. The current state of the market and economy are others.
Step 4- Stabilization
Immediately after the IPO, the underwriter creates a good market for the IPO. Doing so ensures the IPO sells at a reasonable price when the underwriter finds enough buyers.
Step 5- Transition to the Market
The underwriter reveals relevant company performance information. This information gives investors a picture of the company’s market performance before getting shares.
What Are the Pros of Going Public?
Going public has many benefits, and it’s no wonder most companies go public eventually. Here are a few advantages.
Huge capital boost. An IPO is a great way to get capital for expansion projects, research and development, and other company operations
Company can merge with other companies. In doing so, a company can work with a partner for mutual benefit.
Incredible boost to the company’s reputation. It puts the company at par with some of the movers and shakers of the business world. So, going public also puts in a good name for your company.
Increase affinity for talented management workforce. A public company is a great platform for incredible management professionals. Going public makes your company ideal for these professionals to propel your company to greater heights.
What Are Some Disadvantages of Going Public?
Going public is not without its drawbacks. Here are a few disadvantages of going public.
The IPO process is a costly venture. Not only do you have to pay the investment bank for the IPO, a lot of money goes to other professionals like lawyers, SEC professionals, and others.
Scrutiny from the Security Exchange Commission. This scrutiny means the company must tread softly. Contravening any SEC regulations may be detrimental to the company.
Less control of the company. When a company goes public, a lot of control goes to the shareholders. This power shift means managers can no longer make decisions unilaterally without approval of shareholders. In severe cases, shareholders can do a complete takeover of the company.
Increased pressure to perform. Public companies have overwhelming pressure to perform to appease their shareholders. Every quarter, financial reports of the company are made public. The stock market is also very intolerant to sub-par performance.
Companies should go public if they have an appropriate financial management set up. Without this, the chances of falling victim to these cons increase manifold.
Should You Go Public?
With proper organization, the right investment bank, your company can reap substantially from the IPO process and boost profits.
Take a look at our other pieces for more information on current market trends.