There are many important reasons that a company issues an IPO, and decides to go public. These are some common advantages and disadvantages of going public.
Advantages Of Issuing an IPO
IPO; Raising Capital through Investors
The primary goal of an IPO is to raise funds. Companies that are looking to expand their operations, and improve their business need funds to do so.
When they are not able to find more private investors, they may turn to the public. This approach allows the company to tap into investor funds that they never had access to before. Once they raise funds through their IPO, there are a lot of potential uses.
The funds can be used to pay off the company’s debts, or their business expansion purposes. These funds can also be used to distribute dividends in the future. IPOs allow companies to meet a sizable portion of their financial demands.
IPO; Exit For Founders
Many times, the initial founding members of a company are looking to take their profits and back out. An IPO is a great way to do so.
These investors or founders can choose to offer a portion or all of their shares for sale to the public. They do this through an Offer For Sale (OFS). Then, on the launch day, these sales are entered into the pool and are sold to new investors.
This is why many investors who are looking to sell their stake in a company issue an IPO.
IPO; Liquidity Of Shares
Once shares are listed on a stock exchange, they are easy to trade. Normally, issuing shares of a private company is much more expensive and difficult, compared to trading with a public company. Because of this, investors can easily acquire a stake in a company, by purchasing shares.
IPO; Increased Transparency
Since the company has to comply with all the SEBI rules before issuing shares to the public, they have to publish all their financial information. SEBI maintains a close watch on the company to make sure that all financial reports are accurate, and there is no practice of fraud. This boosts investor confidence in the company.
Easy Takeovers
When a company buys another company, it is known as a takeover. Normally, takeovers are expensive to conduct, as all the legal documents have to be in place, along with the shares. Here, expenses are cut down, since the company just has to buy all of the shares. Large companies can take over smaller companies in the same industry, to fuel their own growth
Advertising and Public Awareness
Think about all the companies that you have seen issuing an IPO. Now recollect how many companies you knew before the IPO. You will see that you learned about many new companies through their IPOs. This is exactly why companies issue IPOs. They want to be put on the map. If you don’t know about a company, you are less likely to use its products and services. Public companies gain the people’s trust, and this generates sales as well. If a company’s shares do well, more people will buy them. This increases the company’s market share and makes them a well-known name in the industry.
Disadvantages Of Issuing IPOs
Initial Costs
The IPO process requires underwriters, lawyers, CPAs, and other trained professionals. As you know, hiring these many people requires a lot of money to be paid upfront. There are also other fees needed to be paid such as registration fees, and other advertising costs.
Compliance Requirements
Usually, companies need not issue financial statements very often. When they go public, they need to show their investors their performance. Because of this, they need new auditing staff responsible for their financial statements. This creates new expenses for the company. They also have to follow the requirements mandated by SEBI.
Shareholder Votes
Before going public, the investors and founders of the company have complete control over the direction the company is going. After the public invests in your company, shareholders have a say in board decisions. This can be a challenge for newer companies, as their decisions are affected by their shareholders.
Listing a stock on an exchange is extremely important for companies to grow their business. It also provides important investment opportunities for retail investors. However, there are pros and cons for everything, and IPOs are no exception. So, the next time you see a new IPO, remember the different factors behind an IPO.
