Some major reasons of taking your company public is the fact that raising capital for your company gets easier, an increase in your valuation, and the ability to use stock as currency. Other factors would include liquidity for shareholders, prestige and visibility to customers, incentives using stock options to recruit top level employees, and increased wealth.
In this day in age where lending markets are tight, private companies have looked towards the public markets for help to raise funds. Becoming a public company gives investors more confidence in investing in your company. Having a public stock price gives you a benchmark to raise capital. There are some public companies that offer investors an opportunity to purchase stock directly from the company at a discount to the public trading price in a private placement. Typically investors can not sell these securities for one year. This process will give the investor an incentive to invest. Capital raised can be used for growth and expansion, retiring existing debt, marketing, and most importantly acquisition capital. A public company can go to the public markets for capital with a stock or bond issue and may also convert debt to equity.
Going public gives the company an opportunity to create a market for the stock, giving the company a greater opportunity to sell shares to investors. Stock in a public company has more liquidity than a private enterprise. Most times, institutional investors and venture capital firms will require a company to go public before committing funds. The reason for this is the investors know they have an exit strategy. Liquidity is one of the main reasons why public companies are typically valued so much more than a private enterprise.
Once a company is public and the creation of the market for the stock has been established, the stock could be considered as cash when purchasing other businesses and assets. A public companies increase in valuation can lead to a variety of opportunities including mergers and acquisitions. Because of disclosure requirements from the SEC the public will have more confidence in the annual reports of the company. Market value of a public company is usually substantially higher than a private company with a similar structure in the exact same industry. Taking a private company public usually results in a substantial increase in value to the owners. Public companies can sell 20-25 times their net earnings where the same company that is private will sell for 4-6 times their net earnings.
Another major advantage of going public is the availability to use stock and options as an incentive to attract and retain important employees. There are certain tax advantages as well when considering issuing stock to an employee. Stock compensation can be a way of connecting an employee's financial future to the company's success. Last but not least one of the key benefits of a public offering is the stock will become liquid, offering the founders financial independence. This could be a substantial financial significance. It can also increase the personal net worth of shareholders, even if they do not realize immediate profits. Publicly traded stocks can be used as collateral or as currency to buy other assets.
Although there are many advantages of an IPO and going public, it is not for everyone. One must be prepared to deal with all the red tape the market has in store for you. Going public process can be very confusing at times so try to find an experienced consultant that can guide you throughout the process.
Warren R Fellus
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