7 Considerations for Going Public With a Business
A business may find the need to raise capital for expansion or an investor may desire to depart from the company. The business may elect to sell shares with an initial public offering to raise the needed capital. The owners will select an investment bank which will procure legal accountability for underwriting the shares. The underwriter’s goal is to show a net profit gain. There are seven considerations for going public with a business.
- Raise Funds: The money raised by selling shares with an initial public offering does not have to be repaid. The funds may be utilized for an acquisition of another company, building new facilities, expansion, hiring additional staff, product development, purchasing new equipment or research.
- Relinquish Control: Board approval and approval of the majority of the stockholders must be obtained for many major decisions. The original owners relinquish some control of the company. There may be a threat of a hostile takeover by a dissident group of investors that gain majority control.
- Incentives: Stock options may be offered to entice the interest of top potential candidates for employment. Businesses offering stock incentives often see less employee turn over and happier employees.
- Fees: Legal fees and underwriter’s commissions may be quite considerable. The company may not raise as much money as originally predicted after expenses are subtracted.
- Higher Commissions: Publicly traded companies generally offer higher commissions to management and leadership personnel compared to private businesses. Other large corporations will often tempt managers at successful publicly traded businesses by offering high salaries. Successful managers may become a valuable commodity themselves.
- Profit Demands: Shareholders often do not envision long term goals and are looking to turn a quick profit. Management may resort to short term approaches to reveal a swift yield, rather than planning for the future.
- Sensitive Material: The SEC requires sensitive business information to be disclosed in a timely manner. The businesses' financial statements must pass regular audits. Financial reports and statements must be dispersed to shareholders and filed with regulatory agencies.
*Photo courtesy of U.S. Stocks by ICFM India at Flickr’s Creative Commons.