Say you are an entrepreneur, who started a corporation with a few closely known members as the shareholders. The profit or loss of the Company is borne by these people. As the Company continues to mature and is seen to have growth potential, any Company head would think of making the business even bigger. To make it even bigger, to achieve greater heights, you will need huge capital investment. And you cannot rely on the banks every time.
This is when you should start contemplating on the pros and cons of making an Initial Public Offer.
When a private company sells securities to the public in the form of shares for the very first time, it is known as the initial public offering.
This is the chief reason d'être for a company going public. The company may need money to clear off debts, invest in research and development, expand the existing unit, improve infrastructure, and for many such reasons that help in the future development.
The employees, the stakeholders, and the venture capitalists would have put their sweat and blood for the company to achieve considerable success. The company would have paid them in the form of equities. When the company goes public, it is the time when they start reaping benefits in the form of cash.
When a public company enters into a deal for a merger or an acquisition with smaller competitors, the terms of the deal usually include shares. This makes cash flow to the smaller companies smooth and effective.
Going public gives a company visibility and credibility. The public companies should be better professionally managed, and fiscal data should be more transparent as they have to report it to SEBI periodically. Hence, to the world, the company looks more credible.
Selling a company's equities to the public will generate a lot of liquidity and capital, which can be used for a better future of the company. Hence, the company will be in a more stable financial situation to apply for loans or to negotiate the terms of loans.
When you sell too much of your shares, and your shareholders elect the majority of the board of directors, all decisions need approval by the board members, or at least, by majority of the shareholders. Earlier, the decision-making process finished within a few hours. But now, it can take a few days. Despite trying to keep your focus on the actual business goals, the multiple shareholders together can pressurize you to move away from it.
The Public company information will have rolling costs for periodic reports and proxy statements that are filed with the regulatory agencies and distributed to the shareholders. The company should do audits and any other public company compliance procedures. Every procedure and report has a cost attached to it.
Offering shares to the public is not cheap at all; it has a huge upfront cost. It involves under-writers commission, accounting and legal fees, printing charges, road show expenditures, advertising costs, and registration fees. Management and accounting systems must be upgraded. The departments that handle pesky analysts and you need to get qualified people to sit on your company’s board.
Going public with your company augments the potential liability of the company and its executives for mismanagement. Legally, a public company has an obligation to its shareholders to capitalise on shareholder profits and declare operational data. The company and its management can be prosecuted for self-dealing, making material misrepresentations to shareholders or omitting information that the centralised securities laws require to be disclosed.
All said and done, before going public, sit with your private group of shareholders and assess the company’s financial situation. Make sure you can bear the cost of becoming a public company. If the future capital gain outweighs the current costs, go ahead with the IPO. Nobody is stopping you!