A dollar sign under a magnifying glass.Vishnu Kumar
A decade ago, going public was a sign that a company had "made it" in the financial world. Today, the distinction is no longer black and white – companies are staying private longer, and private capital is filling the gap.
WHY STAY PRIVATE?
Here are some of the key reasons so many firms are staying private:
Costs: The huge costs of going public have become a deterrent. When the extensive legal, auditing, and accounting fees are tallied, the total can range range from up to $500,000 for a smaller company, to more than $1-million for a larger one. And that doesn't include the substantial commission that the underwriter takes on the proceeds.
Disclosure of information: The public disclosure of financial and business information required of public companies has a number of disadvantages. Guidance for investors regarding future prospects can divulge information that is useful for competitors. Disclosure of executive compensation can harm a company's brand. Finally, disclosure of information can set expectations that might limit the company's options.
Volatility: The fluctuation in share prices, which may be driven by external factors, can jeopardize a company's ability to raise capital. As well, the obligation to improve share prices can become a distraction for the management team, and impose pressures that may not align with the long-term interests of the company.
Regulatory compliance: The reporting required of public companies is time consuming and costly. As well, regulatory requirements require control mechanisms that can make a company less agile.
WHY GO PUBLIC?
The lure of going public, however, is not without grounds. The public option has some distinct advantages, such as:
Access to capital: Once a company goes public, this opens the door to future funding through additional share offerings, and allows companies to pursue funding on a larger scale. This often gives companies the flexibility to undergo major expansions or acquire other companies.
Shares as currency: Public companies have the flexibility of using their own shares as currency. These can be used to acquire other companies, tie employee performance to stocks, and provide stock options as compensation for senior managers.
Flexibility for major stakeholders: In a public company, the principal owners have the option of quickly selling their shares, allowing them to keep more money in the business without incurring a major liquidity risk.
Increased public presence: An IPO puts a business squarely in the public spotlight. This is an excellent opportunity to attract new customers, enter into partnerships, and garner media attention.
Access to debt financing: Because public companies are more transparent than their private counterparts, banks are often willing to lend more money at lower interest rates for longer periods of time. They also typically require less collateral.