An IPO as an Ownership-Transition Strategy
You've probably heard a lot about initial public offerings (IPOs)—but how much do you really know about the costs and benefits? Here are some baseline considerations if you're thinking of going public.
For companies that meet certain criteria—and are willing and able to navigate an extensive regulatory process—an IPO can be a viable way to generate capital that can then be used for expansion, investments and debt repayment, among other things.
Interestingly, across various ownership-transition options (see our infographic for the list), IPOs are generally thought to have the most cachet. Because they tend to garner increased media interest, attention and scrutiny, IPOs add a level of prestige to a company, and being publicly traded is akin to being in the big leagues.
Why Go Public?
From an ownership-transition standpoint, company founders may choose to use an IPO as an eventual exit or diversification strategy. If they have their successors in place, then an IPO may provide the opportunity to trade in stock for a liquidity event.
And for those looking to stay on, an IPO can also be very positive, as employees, investors and shareholders can potentially—if they choose to cash in a portion of their holdings—realize a return on investment (ROI).
By opening the company up to a large pool of new investors, an IPO provides immediate access to liquid capital that can be used to fund acquisitions, repay debt or manage working capital. Owners also get the leverage needed to attract new management talent and to incentivize existing employees who may have a stake in the continued growth and scale of the business.
Additionally, as mentioned earlier, the act of going public can be a marketing event for the company. Along with increased public attention on the IPO, there may be increased interest in the business, its products or services.
Why Hold Back?
First things first: IPOs come with strict rules and regulations.
The public nature of the transaction entails extensive regulatory and disclosure requirements. Owners run the very real risk of losing control of “who knows what,” since potentially sensitive information about the company—including financial statements, data about products, customers and vendors, etc.—will become available to the general public.
There are also size considerations. To attract outside interest, a company needs to have an appropriate scale and scope to a) make it worthwhile to go through the process, and b) be considered to be an attractive investment.
Due to stringent requirements from the Securities Exchange Commission, there are also significant costs associated with going public—both in time and in money.
And, along with the initial money and time investment for the management team, an IPO really isn’t an ending—rather, as shareholders look for rising market value in their purchased stocks, the company must continue to innovate and grow. Coupled with the potential for a loss of control if a percentage of shares beyond a threshold amount is sold, the pressure to exceed performance expectations can be a tough pill to swallow.
The Right Fit Matters
It's no secret that there are a lot of legal, regulatory and financial hoops to jump through when you open up your stock for public consumption. But for those who are willing to invest the time and money into the process in the hopes of realizing a higher ROI and an influx of liquid capital, an IPO is a solution you may want to consider.