The move toward becoming a public company requires an entity-wide transformation; one that involves careful preparation and a series of key activities. From accessing the capital markets at the right time to enhancing systems and processes, it’s a decision not to be made lightly. Furthermore, while completing a sale to a public company or filing the effective registration statement may feel like the finish line, it is truly just the beginning. So, how can business leaders determine if going public is the right decision? Carefully and thoroughly considering the advantages and disadvantages of becoming a public company is critical, since making such a decision significantly impacts the company’s ownership structure, financial position, and overall operations. Below are some benefits and drawbacks of taking a company public.
Benefits to an IPO
Taking a company public can have several potential benefits for both the company and its stakeholders, including:
- Valuable Experience: The sense of accomplishment and legitimate experience of having gone through a potential once-in-a-lifetime transaction (to place on the CV).
- Access to Capital: The ability to raise capital to fund various strategic initiatives (i.e., growth, fund research and development, expansion, diversification)
- Liquidity for existing shareholders: Founders, early investors, and employees with stock options can monetize their holdings by selling shares on the public market.
- Mergers and Acquisitions: The ability to fund strategic expansion and consolidation by utilizing publicly traded shares as a form of currency.
- Enhanced Visibility and Prestige: Public companies often enjoy increased visibility and credibility, subsequently gaining attention from customers, suppliers, and potential strategic partners.
- Currency for Acquisitions: Publicly traded stock can be used as currency for acquisitions, making it easier to pursue growth through mergers and acquisitions.
- Employee Incentives: Stock options and equity-based compensation plans can be tools for attracting and retaining top talent.
- Process Improvement: The opportunity to develop, streamline, and optimize already existing or new processes and technology across the organization which will support life as a public company.
- Increased Transparency: Public companies are more transparent than private companies because they need to publicly disclose information, including financial statement results.
Drawbacks to an IPO
While taking a company public can offer various benefits, there are also several potential drawbacks and challenges associated with the process, including:
- Monetary Costs: Underwriting fees, coupled with legal, professional, and other fees can add up, but are generally offset by the substantial amount of capital that would be raised from the IPO.
- Regulatory burdens: Going public creates a mandate and burden on legal, accounting, and regulatory compliance (for example, continuous reporting and disclosure requirements by the Securities and Exchange Commission’s Exchange Act filing requirements).
- Increased Workload: During the lead up to the IPO, it can turn attention away from the day-to-day needs of the company and likely expand the existing workload for many within the organization. Oftentimes, however, this can be resolved by bringing in an external 3rd party that specializes in public company readiness activities.
- Diversion From Long-term Goals: Managing for short-term public company quarterly revenue and profitability metrics can deter management from the long-term goals, business plan, and strategy of the organization.
- Increased Scrutiny: Lifting the private company veil and publicly exposing financial information can result in increased oversight and scrutiny by many different folks/groups.
- Required Upgrades: Processes, people, and accounting information systems will likely require upgrading. Overall, this is a positive initiative for an organization, but often becomes a critical, costly, and time-consuming part of public company readiness.
- Legal Liability: Public companies face potential legal and regulatory risks, including shareholder lawsuits and government investigations.
The decision to take a company public is a complex one that should consider the specific circumstances and goals of the company and its founders. It is essential to weigh the advantages of access to capital and liquidity against the costs, loss of control and regulatory burdens associated with being a public company. Additionally, companies should carefully plan their post-IPO strategies to navigate the challenges and opportunities that come with going public.
How MorganFranklin Can Help
MorganFranklin executes a proven methodology that will enable your company to complete its IPO on time and to be prepared for life as a public company. Through our IPO Readiness Assessment, we focus on both the registration statement and public company readiness, applying a structured methodology for analyzing and evaluating your company’s preparedness for going public. Our assessment culminates with the delivery of an IPO Readiness report that provides customized and comprehensive recommendations and observations, recommendations, and strategies for achieving public company readiness.
Additionally, as Vaco’s global consulting platform, we offer integrated end-to-end expertise and hands-on partnership, supplementing our methodologies and teams with end-to-end staffing, executive search, and interim executive services.