Advantages and disadvantages of going public

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The first public offering of equity shares of a company, which is followed by a listing of its shares on the stock market, is called the Initial Public Offering (IPO). Often going public is the best choice of growing business. The decision to go public is a very important business financing strategy of a company. Therefore we must discuss the Advantages and Disadvantages of going public.

Going Public (IPO)

Advantages of going public

Lets first discuss some advantages of going public:

1) Access to Capital:

The principal motivation for going public is to have access to larger capital. A company that does not tap the public financial market may find it difficult to grow beyond a certain point for want of capital. The biggest advantage of going public is the capital raised.

2) Respectability

A company which goes public commands respectability. Pubic companies offer more growth potential compared to non-public companies. Hence they can attract superior talent.

3) Exploit the opportunity

Many companies are usually started privately by their promoter(s). When a non-public company recognizes that other companies in the industry are overpriced. It has an incentive to go public and exploit that opportunity

4) Scope for diversification

When a company goes public, original owners, investors, managers etc. can cash out of the firm and build a diversified portfolio.

5) Reality Check from Market

Market forces decides stocks prices of the companies which are publicly listed. Managers can use this information as a feedback for the improvement of the company.

6) Reduces the Marketing cost

Going public attracts media attention. Business Newspapers, TV Channels, Websites, Magazines etc. focus on public companies for providing information to the Investors. This increases the exposure of the public listed companies and their products.

7) Helps Business growth

Going public gives companies an increased availability of capital which can be used for building a competitive edge and increasing the market share by increasing the market penetration.

8) Increases Network

Public companies can build a great network of suppliers, distributors, and partners due to their reputation as a Publicly listed company.

9) Ability to take advantage of market price fluctuations:

Once public, a company can take advantage of market price fluctuations to sell stock when the markets are hot, buy back the stock when the market is cold. This can often be an effective and low cost way to raise significant capital.

Disadvantages of going public

A public company (or, more precisely, a listed company) is not an unmixed blessing. There are several disadvantages to going public

1) Adverse Selection

Investors, in general, know less than the issuers about the value of companies that go public. Hence to stimulate interest and participation of Investors, companies has to under price its securities.

2) Loss of Flexibility

The affairs of a public company are subject to fairly comprehensive regulations. Hence when a non-public company is transformed into a public company there is some loss of flexibility

3) Disclosures

Public companies must make extensive disclosures and submit to stringent regulations. They are required to disclose a lot of information to investors and regulator. They can not keep secrecy of their expansion plans and product marketing strategies.

4) Accountability

Understandably, the degree of accountability of a public company is higher. It has to explain a lot to its investors. Investors who want to see the rise in their share prices often scrutinize every action of management

5) Public Pressure

Because of its greater visibility a public company may be pressurized to do things that it may not otherwise do. It really upsets the Entrepreneurs who started those businesses. Market pressure can compel Management to focus on short-term results instead of long term growth.

6) Expenses

The cost of complying with SEBI rules and regulations is high and it is getting higher. The cost of going public is substantial both initially and on an ongoing basis. Fees of financial reporting documents and investors relations, stock holding meetings, and other expenses are significant.

These are some of the disadvantages of going public.


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