For many entrepreneurs with promising businesses, going public is the ultimate dream. Going public, of course, means that you are offering part of the ownership of your business to the public.
By selling shares of stock of your business, a process called an initial public offering or IPO, you can raise fresh capital to help finance your business expansion. You may also gain windfall profits from selling your shares. In any case, people in the stock market will begin trading your stock. They probably will regard you as a celebrity of sorts and they will watch every step you make for your company. Before you make any plans for an IPO, therefore, it would be advisable to very carefully consider the pros and cons of doing it.
The most obvious benefit of an IPO is, of course, getting access to additional capital. When your company is growing so fast and its expansion can no longer be financed by your internal cash flows, going public can help you raise the additional funds you require.
You can do this either by selling shares or by issuing debt securities to investors. Once you do so, your status will change to that of a public company, something that can make it easier for you to borrow money from the banks at more favorable terms. The additional funding that can be generated by your IPO can, of course, help you finance your working capital needs, acquire your competitors if need be, or expand your business to gain greater market share.
Once your shares begin trading in the stock market, you will acquire an instant and continuing reference to the current market value of your company. Your stock price will serve as a market indicator of how your company is performing.
On that basis, you can start offering stock options to attract and retain talented employees, or give your employees stock options as incentives to encourage productivity, good morale, and loyalty. This, in turn, will give your stock price a greater upside potential, since the better your employees perform, the bigger will be your company’s earnings prospects.
As a public company, you will also enjoy improved credibility with your suppliers, distributors, and customers. The improved image of your company will give you more prestige and a better reputation in the business community. You will become a more attractive partner to big private firms, who will understandably feel more secure and confident in doing business with you.
It is also likely that your company will get more attention from the mass media like the newspapers and business magazines, which will be more inclined to provide publicity for your company that can support its marketing efforts.
Since your stock price will reflect the market value of your ownership in your company, your personal net worth will also be enhanced by the trading of your stocks. Indeed, the liquidity of your shares will substantially improve your ability to do personal financial planning. For instance, you can leverage the market value of your personal stocks as collateral to secure borrowings for, say, buying your dream house, or you can perhaps use your shares for your estate planning.
These are the many advantages of doing an IPO, but be aware that there are also disadvantages in doing so. To begin with, you may not be comfortable publicly disclosing so much financial information about your company. Once yours becomes a listed company, all information about your product margins, profitability, and other financial indicators—things you normally would not discuss even with your own employees— will suddenly become available to anyone, including your customers and your competitors. And as a “celebrity” company, there will always be pressure—both within and outside your company—on your management team to perform according to public expectations.