Going public vs. staying private: which do you think would benefit your business more? Should you go public or stay private? A question some successful private companies might have asked themselves.
To understand these two models better, let’s explore further into the pros and cons of going public vs. staying private.
Going public could mean bigger profits and greater reputation, but then again an initial public offering (IPO) can be a long and costly process.
Choosing to remain private means you do not have to change the company’s focus or its approach just to fulfill the expectations of a certain stock exchange. However, it would also mean that you cannot use your stock as payment to acquire your competitors or other businesses.
Pros of Going Public vs. Staying Private
Profit is usually the main reason why a number of privately held companies decide to carry out an IPO. Going public opens the door to a significant amount of money that you can invest to accelerate the business’ growth.
Being able to raise capital in public markets is another attractive advantage of becoming a public company. The capital raised during the process can help improve the business. Be it in the form of research and development (R&D), infrastructure, or resolving expenses and existing debt.
Company Stock as a Currency
A public company’s stock can be use as a currency that can be purchased or sold in the public exchange. By doing so, it will enable you to take over other companies, speeding up the expansion of your business and strengthening your position against the competition.
Learn more about the top stock exchanges around the globe on The World’s 13 Major Stock Exchanges You Should Know About.
In addition, issuing a stock in your company does not only monetize investments of private investors, it also grants you the ability to raise funds without having to pay any of it back. Moreover, you can perform secondary offerings to regenerate funds to avoid borrowing money.
Going public is also viewed to be crucial for conducting business with others. It lessens the effort that you have to exert to secure the funds that you need, given that the money generated by the company usually bolsters the balance sheet.
Potential investors would also have less trouble in examining the company’s information, since all the necessary paperwork has already been filed with the Securities Exchange Commission (SEC).
Additionally, the IPO process offers companies a greater branding opportunity. This allows them to state who they are to investors, potential employees, and their enterprise customers, most of all, for whom being public suggests better legitimacy and stability.
You can also use IPOs as an exit strategy. Several venture capitalists have used IPOs to profit from businesses that they helped set up in the first place.
Owning a privately held company gives you absolute authority over operational decisions. You also do not have to be concerned about meeting expectations of shareholders, or them meddling in your affairs.
You can continue to what you are doing to bring in the profits that have build up your business, without worrying about several outside stockholders or surrendering control of your company. Since your company does not abide by SEC regulations, you can focus on long-term growth strategies
Shareholders in publicly owned businesses usually checks on the latest earnings result, in which they can put a huge amount of pressure to further lift earnings in the short term to raise the value of their stock.
One advantage of staying private is that you do not expose your company to the risk of an IPO. Not every business executing an IPO ends up victorious. Succeed at it and great rewards await you. Fail at it and it might be the end of your company.
The corporate world is filled with small businesses, with some of them lacking the necessary funds to maintain a public offering.
What you need is to have a strong group to support and back you up to keep the company’s stock trading properly. Fail this, and your business could wind up as a penny stock and getting delisted from the exchange.
Know the best penny stocks to invest in this year on the Top 10 Penny Stocks You Should Watch in 2018.
That is why if your private company has prospered enough to qualify for an IPO, you really have to consider whether you may be better off keeping things unchanged or not.
Selecting Potential Investors
Remaining private also gives you the freedom to pick who gets to invest in your business. While you may be reporting to a limited number of investors, the group of potential investors is smaller, since they have to meet the company’s standards first.
Privately held companies can choose not to reveal information about their operations that their competitors might use to their advantage.
The SEC has strict disclosure policies for public businesses that can unveil details that you might prefer to keep confidential. Such sensitive information includes detailed annual/quarterly financial reports, executive compensation, and legal settlements.
Cons of Going Public vs. Staying Private
While the huge cash generation is a tempting enough reason to go public, an IPO does not come in cheap. You can end up having more expenses as a public company than a private one.
The process itself is already expensive, especially when you are about to go on road shows. The fees and expenses of going public can amount from six to seven figures.
If your company has grown considerably over the years, then you might be able to handle the additional expenses of being public. If your business is small, however, you might see your net income getting consumed by costs you did not carefully taken into account.
Time is also one of the major disadvantages in an IPO. Going public does not happen overnight. The process could take months or years to complete.
Your senior management will have to spend most of their time on road shows, networking and establishing connections with potential investors and partners, instead of taking care of the actual business.
During that time, a great amount of effort must be allotted on advanced planning to ensure the IPO’s success. For this reason, you have to be certain that the offering is in line with the strategic priorities of your business, partners, and investors, before you use any resources.
The time and financial drawbacks do not end after the IPO is done. Once your company officially becomes a public business, you will have to deal with several SEC regulations that could cost a lot.
While the rules reduce the chances of a scam happening, they also make it harder for companies with small resources to go public.
Missing Top Talent
Remaining privately held leaves you incapable of attracting top talent. Drawing top talent is usually done through benefits, such as stock options. Public companies can afford such incentives, but the private ones sometimes cannot, thus, making them lose top talent to bigger businesses.
Company Stock Cannot be a Currency
While publicly traded companies are allowed to use their stock to buy its competitors or other businesses, the case is different with private companies.
If you are a private business, who intends to acquire companies, then you might be up for a challenge. You will either have to have money or borrow debt to claim other companies.
Still, while debt can be useful, it has to be managed carefully, as it could harm the company if mismanaged. Stock, on the other hand, is a better source of funding. The money from a round of equity investment can be used to step up the expansion of the business, driving both the top and bottom lines.
Liquidity is limited for those investing in a private company. They cannot just sell their stake in the business by going to a public exchange. Current owners are typically the only likely buyers for companies that are less recognized.
Selling shares in a secondary market can be quite a challenging task to perform, given that the potential buyers must be accredited investors.
Read everything about trading in shares on Buying and Selling Shares 101: A Beginner’s Guide.
Accomplishing an IPO is a major milestone for any company. Still, you need to be absolutely certain if going public is the right move for your business.
When it comes to profits, activities, and entrepreneurial sustainability, you will not exactly see a finish line present. The core of your company must lie on creating a business that would last for long time even as a brand.
However, deciding on whether you should go public or stay private depends on your company’s specifics and your pursuit for growth.
Businesses that have gone public can gain from a higher amount of available capital, market exposure, and growth potential, but then they lose their privacy the moment they go public. On the other hand, companies deciding to keep their privacy are able to save money, but then they reduce the capital they need.
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