Why Do Companies Go Public?
Companies go public to achieve several financial and strategic goals. This means when a company goes public it issues shares for sale to the public via the process called an Initial Public Offering(IPO). Through this process, companies can raise funds, which can be used for the growth, research, and development of the firm. These methods also help build up the company’s greater visibility and credibility within the market. Moreover, going public may give new ways for the growth and expansion of a company. In this blog, you will understand what going public means, the importance of IPO, and its advantages and disadvantages.
Key Highlights
- An IPO can provide substantial cash for development, settlement of debt, and improve the company’s internal operations.
- The conversion of shares into cash makes it possible for public organizations to give liquidity to employees, stakeholders, and venture capitalists who contributed to the company’s growth, thus benefiting them financially.
- By being listed on the stock exchange, public firms gain more visibility and credibility as they are required to follow regulatory requirements besides publishing their financial statements which builds trustworthiness.
- Going public allows firms to utilize shares in mergers and acquisitions making transactions easier and smoother.
Table of Contents
What Does ‘Going Public’ Mean?
Going public is very important for any company as it changes the ownership from private to public. It is a culmination of the efforts of the founders, employees, and promoters. There are several legal and financial steps involved in it. However, some companies and startups find it worth it because of the benefits such as raising funds and improving their reputation.
The most common way for a company to go public is through an initial public offering (IPO). This means that the company offers its shares to the public for the first time. For this to happen, the company hires an investment bank with experience in selling shares. Afterwards, certain legal and financial rules must be complied with like preparing a draft red herring prospectus (DRHP) and filing with SEBI among other ongoing regulations.
After these steps have been complied with, shares are sold thus making the company public; henceforth, trading in stock markets such as NSE or BSE can be done.
Importance of an IPO
A high quantity of funds can be raised through an IPO. It becomes important for a company to go public to expand its operations and gain visibility. However, the importance of an IPO is more than just this. So, let’s discuss the same in brief:
- Companies launch an Initial Public Offering (IPO) before going public. This means their stocks can be sold and purchased on stock markets. The share prices for them are determined by market forces. Thus, ensuring a fair share value is decided.
- Investors benefit from an IPO because they can buy shares when the business is at an early stage. This makes them early shareholders who can earn dividends and benefit from increasing share prices before others buy-in. Moreover, investors might stay invested if they think the company will grow.
- Funds raised through an IPO are called equity capital because they come from the investors and not borrowing institutions. This helps avoid the high costs of taking on debt.
- When someone invests in an IPO he or she becomes co-owner of the business, consequently receiving dividends plus participating in management decisions.
What are the Advantages of Going Public?
Going public can offer several benefits to a company. Let’s discuss the advantages of going public in brief:
Raise Funds
A public offering’s primary objective is to raise capital. This finance can be used in settling debts, funding innovative activities, continuing the expansion process, and enhancing its structures which are essential for long-term developments.
Increase Liquidity
Shares can be offered to employees, stakeholders, and venture capitalists who have worked tirelessly towards achieving success for the enterprise. These can be turned into cash once the company becomes public. Therefore, enabling them to benefit financially.
Helps in Mergers and Acquisitions
When a public company merges with or acquires smaller companies, it often does so by using shares in the deal. This eases and smoothens the payment process for such smaller firms.
Gives Visibility and Credibility
A company becomes more visible and trustworthy after going public. When a company is listed, it has to function efficiently and submit its financial statistics with SEBI which helps in building trust and reliability.
Improves Financial Situation
Selling shares publicly generates huge amounts of money that enhances the financial stability of a company. This additional financing enables the firm to improve its capacity to get loans or negotiate for lower interest rates when borrowing.
Disadvantages of Going Public
It is important to know both the advantages and disadvantages of going public. So let’s discuss the disadvantages of going public in brief:
Laborious Decision-Making Process
The shareholders can elect most of the board of directors when a company sells too many shares. This means that major decisions require consent from either the board or a majority of shareholders, which may be time-consuming.
Reporting Costs will Go High
Companies have to file reports and proxy statements regularly with regulatory agencies and shareholders. This involves costs for audits and other forms of compliance.
High Initial Costs
Initially going public costs a lot of money. It includes responsibilities that need to be paid for by traders, auditors, and lawyers. It also includes expenses for publishing that is done during roadshows, campaigns, and registration. Moreover, the firm is required to enhance its operational and bookkeeping framework and search for qualified board members.
Increased Liability
The company along with its officers will have potential legal liabilities that will increase as it goes public. The company should provide complete and truthful financial information to shareholders. Not meeting this responsibility may result in such legal issues or misrepresentation of information.
Conclusion
When a company publicly goes, it enjoys several benefits such as attracting significant resources, gaining publicity, and enhancing credibility. Moreover, the IPO allows companies to leverage on equity capital for growth, lower debt levels, and raise their financial power. It also enables merger and acquisition transactions using shares as part of the deal. However, this procedure incorporates complicated choices, expensive charges, and more reporting requirements. Despite these limitations, many companies decide to go public because it offers them a chance to attract investors and expand their business operations.
FAQs on Company Going Public
Going public is beneficial for the organisation and it regulates its operations. The stock prices may rise, thereby assisting previous shareholders and proprietors. A firm acquired by another may not be able to gain such an advantage.
To stay in control of the company and prevent additional expenses, some firms may opt against going public.
The stock exchange is connected to the companies primarily through a merchant banker. They provide consultative services to firms on matters including mergers and initial public offers (IPOs).
Not all companies go public. However, carefully considering objectives, potential for growth, and preparedness should be undertaken before making such a decision. Private businesses can be better off getting other sources of funding.
Employees can benefit when a company goes public through stock options or grants. Publicly traded stock can be more liquid, and employees may gain from increased company valuation.
The decision to be acquired or go public depends on company goals. Going public offers access to capital markets, while acquisition provides immediate liquidity and resources.
Some companies avoid going public due to the regulatory burden, loss of control, and increased scrutiny.
Yes, a startup can become a public company through an Initial Public Offering (IPO). It involves issuing shares to the public, raising capital, and becoming listed on a stock exchange.