The Benefits and Costs of Going Public

 

Completing an IPO will often involve significant changes to corporate, capital and management structures, and once public, a company will be subject to a number of rules and reporting obligations. With a host of benefits—as well as costs—the decision to go public requires careful consideration.

Going public has considerable benefits:

  • A value for securities can be established
  • Increased access to capital-raising opportunities (both public and private financings) and expansion of investor base
  • Liquidity for investors is enhanced since securities can be traded through a public market.
  • Publicly traded securities are attractive for certain other purposes (as transaction currency or executive and employee compensation, for example)
  • Credibility and visibility with the public is enhanced, as is the corporate image
  • Lower cost of capital relative to debt financing

Although there are many benefits, the costs of going public are considerable–for example:

  • Upfront costs of an IPO can be significant. Underwriters’ commissions are typically 4%–7% of the proceeds of an IPO; their expenses are additional. A company will also incur other offering expenses, including legal, accounting, printing and filing fees, and will be subject to ongoing costs associated with public company compliance obligations.
  • IPOs lead to greater public disclosure and scrutiny: financial results, share price, management and director performance, executive compensation, corporate governance practices and insider trading information will all be available to the public.
  • The controlling shareholders’ percentage equity interest and voting interest in the company is typically lowered – a situation that, among other things, could make the company vulnerable to a control transaction.
  • Extensive management resources are required.
  • Transaction freedom is more limited (related party transactions for a public company are regulated, and listed companies are subject to stock exchange requirements, including requirements for shareholder approval of certain matters).
  • The potential for lawsuits against the directors and management is increased.