Almost all companies are launching Initial Public Offering (IPO). It is the first sale of the company shares in the primary market. Several small and large businesses are launching IPOs to collect more capital. It is a smart alternative to business loans, since the owner does not have to worry about incurring interests and paying off the creditor. However, the launch of public stocks does come with its restrictions. Going public has several disadvantages that a company has the face from time to time.
Here are the few unique changes that a company has to embrace for going public –
- The company has to make its policies and plans public to the investors. The business must work with an underwriter to draft a prospectus. It is a financial report containing all the investment details and plans for the company.
- There is an increased cost of compliance. The cost is often hindering or prohibitive for smaller companies.
- There is high chance that the company’s focus shifts from long-term growth to short-term results. It might cause a drastic change in the nature of business operations.
What challenges do public companies face?
Decision of investment in IPO depends on the individual investor, but whether or not to go public depends on a number of intricate factors that govern the operations of a corporation. Even with all the advantages a company can enjoy after the launch of its IPO, there are several drawbacks it might have to face. Here’s a common set of disadvantages every company going public experiences –
The added expenses of going public
IPO is an expensive process. For several startups and small businesses, the cost of legal requirement of the process is prohibitive. Companies go public with the hope of financial improvement, but the continual expenses of litigation might undo the financial benefits of the process. There are legal fees to be paid, advertising costs and accounting costs that the company has to bear. These additional costs can add up to hundreds of dollars.
Disclosing company details and increased reporting requirements
Going public is necessary for gathering new funds for business. However, it also requires the company to make crucial details public that includes its plans for the capital raised through IPO. A public enterprise is obligated to disclose its quarterly and annual reports regarding finances, business operations, and the compensation of officers and directors. There is a loss of privacy rights since the corporation has allowed the public to invest in its shares.
Enhanced regulatory supervision
When you go public, your business has to comply with the national standards for public corporations. Apart from the reporting needs, there are certain mandates that your public company has to follow. When you agree to go public, the decision places your company directly under the purview of the stock exchange that is handling the listing requirements of the company stocks.
There is an increase is liability
You increase the potential liability of the company the moment you agree to go public. The corporation is obligated by regulations of the share market and the stock exchange to maximize the possible profits of the shareholders. In the absence of disclosure of company information, the management can face lawsuits for self-dealing, material misinterpretations and non-discloser of information that may have influenced the decision of the investors.
It challenges smart utilization of time
The process of going public takes a lot of time. It might take six to nine months, if not a year, to launch an IPO. According to the opinions of several business owners, who have taken their corporations public in the recent years, to new businesses it might prove to be a misuse of their time. Businesses have the chance of doing better if the management invested the time in fine tuning existing business operations and investment options.
Dilution of authority
Most companies bring in multiple shareholders. Depending on the massiveness of a company’s value, the number of share holders can vary from a few tens to thousands. It dilutes the authority of ownership. As a result, the founders and initial legal owners of the enterprise are longer in a position to make administrative decisions. During every major decision, they need to inform and counsel with the new shareholders. Shareholders reserve the power to elect new board of directors (BoD) and overrule any decision the management makes. It is one of the most concerning disadvantages of an IPO.
It adds extra risk to the company’s future
Any company goes public to increase the liquidity of its assets. When a promoter of the IPO sells his or her share in the near future, it can be seen as lack of confidence by the other shareholders. Since the new shareholders have the right to sell their stocks at any time, it might prompt a mass sale of the company stocks in the secondary market at the fraction of the buying price leading to a sharp decline of the prices in the secondary market.
IPO looks like a lucrative option for the company founders, current shareholders and the prospective investors, but at the same time it increases the underlying risks, decreases authority and enhances the liability of the company owners.
Should a company stay private or launch IPO?
Whether you should go public or stay private should depend on the potential disadvantages and advantages of your corporation. The financial and operational necessities of a company are unique. There is no way launching IPO can be a great option for all companies active in 2018. The decision should take into consideration the existing finances, operations and liabilities of the corporation. IPOs might be the hottest trend of 2018, with over a hundred companies joining the public offering fever this year. However, that does not mean all company stocks will perform equally well in the market. Even the ones that perform marvellously in the primary market can face severe losses in the secondary market.