Advantages and Disadvantages of Being Public Advantages

 

 

 

 

Going public is an attractive alternative for many companies because of the many ad- vantages it confers. These include:

•The acquisition of a large amount of cash for company growth (whether internal or through acquisitions), hiring of talent, increased marketing, greater research and development and expanded products and services;

•Access to the public capital markets after the IPO, which generally enables a com- pany to raise money more quickly with less cost and more flexibility than in the private markets;

•The ability to use the company’s stock as “currency” to acquire the stock or assets of other companies because sellers are more willing to accept stock having a liquid public trading market than illiquid private company stock in a sale transaction;

•Greatly increased liquidity for investors and employees through the creation of a liquid public market and greatly expanded pool of potential purchasers to facili- tate sales of stock;

•Expanded potential use of stock options and restricted stock to incentivize, moti- vate and compensate employees;

•Creation of potential significant wealth for founders and pre-IPO stockholders;

•Increased corporate reputation, stature, visibility and credibility with investors, customers, business partners and current and potential employees; and

•Increased market value for the company, because the illiquidity discount appli- cable to private company stock has been eliminated.

Disadvantages

Going public is not necessarily a panacea. Becoming a public company has significant disadvantages as well, some of which include:

•Extensive public disclosure requirements applicable to publicly held companies, which invite scrutiny, may effectively reduce management flexibility and may disadvantage the company by providing valuable information to competitors, sup- pliers, customers and business partners;

•Significantly increased capital and human resource costs in executing an IPO and subsequently maintaining status as a public company;

•Pressures on management engendered by reporting quarterly and annual financial results and the short-term bias of Wall Street expectations;

•Increased risk of class-action lawsuits and personal liability for directors and of- ficers and the significant cost of obtaining director and officer liability insurance;

•Distraction of management’s attention from the business during the IPO pro- cess, and afterward during public company life when management must devote substantial effort to comply with laws and regulations, such as those relating to public company corporate governance and disclosures, and investor relations;

 

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