Going Public vs. Staying Private

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.

While it minimizes analyst coverage and limits trades on shares, benefits to going private include:

Reducing shareholders to less than 300 suspends obligations to file public reports with the Securities and Exchange Company (SEC), ending quarterly financial filings.

Non-SEC companies don't have to worry about shareholder expectations, hostile takeovers or buyouts.

Private businesses don't have to disclose sensitive operations information to competitors.

Private companies have fewer costs as they have no reporting requirements.

Non-SEC reporting companies don't have to produce short-term per-share earnings and can focus on long-term growth strategies.

Public businesses might think of cost-saving benefits, but they may actually lose capital and increase risk:

Private companies lose access to public capital markets, which can make it difficult to raise capital or expand.

Private businesses lose benefits with registered securities and lose statutory safeguards included in the Sarbanes-Oxley Act. Shares may lose liquidity and value.

Officers and directors may be liable for private transactions. If shareholders increase, costs may accrue with filing reporting statements and past reports.

An IPO can be alluring and may increase capital for growth and business expansion.

Other benefits include:

IPO success can create millionaires; in some cases, overnight.

Equity financing can help with strategic growth, R&D, staffing, and new products and services.

Secondary stock offerings can help raise capital and IPOs can enable a business to acquire other companies using stocks, instead of available cash.

For senior staff approaching retirement, it's easier to sell shares from public companies.

There are downsides to taking a business public that should be evaluated. These include:

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.

Public companies incur SEC filing fees and equity may be lost when shares are sold publicly.

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.