There are numerous growth strategies a company can consider, some of which includes:
- Initial Public Offering (IPO),
- Growing organically, and
- Mergers and Acquisition.
While all of the options above are as intriguing as one another, going public is often the dream of most Small Medium Enterprises (SMEs) owners. Yet only a handful has contemplated the pros and cons of it.
As such, this article will look to explore the key factors that should be considered before going public.
What is IPO?
An IPO is the first sale of share by a private company to the public, usually done simultaneously with listing the shares on the stock exchange. IPOs are often issued by both smaller and larger companies seeking to further expand their companies by raising more capital.
Generally, in an IPO preparation, an underwriting firm would assist the company to attract sufficient investors’ interests by determining what type of shares to issue, the best initial offering price, and when to issue the shares to the market. Even though raising capital can have significant upsides for a company, there are also disadvantages associated with going public that the owner has to thoroughly consider.
1. Raising Capital: This was the original objective of the world’s first ever IPO which was undertook by Dutch East India Company in 1601 to outfit a proper fleet. Today, many companies still use this method of fund raising as it is arguably the fastest and easiest way to raise large amounts of capital. Capital raised could be utilised to fund expansion plans; such as research and development of new product lines or even to fund an acquisition takeover
2. Market Exposure: By being publicly listed, the company will capture the attention of both local and global investors and customers. The increased publicity and prestige that comes with the listing creates public’s awareness of the company and its value proposition. It is especially useful for Business to Consumer (B2C) companies which usually depend heavily on marketing that targets the mass market. On the flip side, the increased coverage by media is essentially a double edge sword as adverse news of the company would also be given the same amount or even more coverage.
3. Exit Strategy: The owner sees no return of his investment until he realizes his investment by liquidating his share in the company. By being listed effectively creates a ready market for the ownership of the company. With the process of looking for a ready buyer now facilitated by the stock market, the sale process of the company share by the owner would be greatly simplified.
1. Loss of control: This would be a major disadvantage if the owner has a hard time letting go of his company. Once the company goes public, the ownership of the company would hinge upon the individual’s shareholding. As such, if the owner liquidates the majority of his shares to the other investors and ends up holding only a minority amount of the shares, the owner might risk losing his controlling rights of the company.
2. Added Disclosure For Investors: The company’s financial statements are now required to be fully audited and disclosed to a particular standard to the public. This would probably mean that the company has to invest and incorporate the use of accounting systems into their current operations in order to comply with such heavy disclosure regulations. Moreover, added disclosure would reveal significantly more information about the company operations that could potentially be considered sensitive to some owners, such as remuneration package.
3. High Initial And On-Going Costs: Preparing for an IPO requires a lot of time and resources. The company must hire underwriters, audit firms, attorneys, public relation firms and other relevant parties for advice during the preparation of IPO and issue of shares. This would be of a particular challenge if the company has limited funds. Furthermore, the cost of complying with the regulatory requirements, such as corporate governance, can be very expensive. For instance, companies must start to pay for annual listing fee, maintaining a Board of Directors (BoD), introduce Corporate Social Responsibility (CSR) initiatives.
4. Subject To Market Expectations and Condition: The share price is affected by various factors, such as market conditions and investors’ expectations, which are beyond the management’s control. Ceteris paribus (i.e. with all other things held constant), a company’s share price would generally be positively correlated with the market condition. In other words, this means that if the market shows signs of recovery then the company’s share price would be likely to exhibit the same trends of improvement. Additionally, if investors’ expectations are not met, it would more likely to result in deterioration of the share price.
In conclusion, by going public, a company can reap many benefits but will also incur corresponding costs. If these pros and cons are not properly analysed alongside with the company’s capability and capacity, it would not have a solid foundation when going public and moving forward.