The lure of initial public offerings (IPOs) can be tempting and an exciting time. Businesses can benefit from the increased capital, market exposure, and growth potential, but there are risks. Companies lose their privacy when they go "public". On the other hand, taking businesses private can save money but can decrease the capital that a business needs. Before going public or private, businesses should weigh the pros and cons thoroughly.
The Pros of Going Private
While it minimizes analyst coverage and limits trades on shares, benefits to going private include:
Right of Non-Disclosure
Reducing shareholders to less than 300 suspends obligations to file public reports with the Securities and Exchange Company (SEC), ending quarterly financial filings.
Decreased Pressure
Non-SEC companies don't have to worry about shareholder expectations, hostile takeovers or buyouts.
Increased Privacy
Private businesses don't have to disclose sensitive operations information to competitors.
Lower Costs
Private companies have fewer costs as they have no reporting requirements.
Increased Control
Non-SEC reporting companies don't have to produce short-term per-share earnings and can focus on long-term growth strategies.
The Cons of Going Private
Public businesses might think of cost-saving benefits, but they may actually lose capital and increase risk:
Loss of Capital
Private companies lose access to public capital markets, which can make it difficult to raise capital or expand.
Loss of Shareholder Benefits
Private businesses lose benefits with registered securities and lose statutory safeguards included in the Sarbanes-Oxley Act. Shares may lose liquidity and value.
Increased Liability
Officers and directors may be liable for private transactions. If shareholders increase, costs may accrue with filing reporting statements and past reports.
The Pros of Going Public
An IPO can be alluring and may increase capital for growth and business expansion.
Other benefits include:
Lucrative Financial Rewards
IPO success can create millionaires; in some cases, overnight.
Faster Access to Capital
Equity financing can help with strategic growth, R&D, staffing, and new products and services.
Capital Market Access
Secondary stock offerings can help raise capital and IPOs can enable a business to acquire other companies using stocks, instead of available cash.
More Liquidity
For senior staff approaching retirement, it's easier to sell shares from public companies.
The Cons of Going Public
There are downsides to taking a business public that should be evaluated. These include:
Loss of Privacy
Public companies must adhere to strict SEC regulations regarding full disclosure. This includes sharing information that they might not want their competitors to know about.
Increased Costs
Public companies incur SEC filing fees and equity may be lost when shares are sold publicly.
Decreased Freedom
Public businesses have less freedom because they answer to shareholders, brokerage firms, a board of directors, institutional investors, and the press.
The decision to go public or private is one that CEOs and CFOs should explore in-depth. It may depend on company size and growth expectations of the business. The assistance and advice of legal counsel experienced in initial public offerings (IPOs) can offer further insight in the decision process to cultivate the best strategies to optimize long-term growth.
