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“Going Public” and then offering up stock in an IPO is often times a major dream for a lot of entrepreneurs.  It represents the “pinnacle” of success.  The American Dream for business owners–to hear the opening bell at the NYSE and see their ticker symbol running across the screen.

While all that is certainly fun to think about, and certainly, an IPO can be a milestone for a lot of companies, there are a large number of good business reasons why a company might decide to go public, such as obtaining financing or paying off its debts.

Taking a company public immediately reduces its overall cost of capital, and it gives the company a firmer ground to stand on when negotiating interest rates with lenders (banks or otherwise).  This reduction in cost of capital can have a very direct and immediate impact on its bottom line and its market value.

The owners of the business, while it is private, and certainly the founders, can also drastically change the risk profile of their ownership in the business.  All of the sudden, their ownership value goes up (much due to some of the factors listed above), and, there is now less risk.  Their stock, in general terms, is now held in a business that is on firmer ground and all of the sudden, they have the ability to market and sell portions of their ownership.  The ability to liquidate ownership in a private company is difficult and arduous, let alone being able to sell small portions of it.  Being able to sell shares in a public company allows the shareholders to diversify their personal finances instead of having it all tied up in the ownership of a private company.

All that being said, the main reason for going public is to raise money, and a lot of it!  This provides fuel for growth and allows the shareholders to spread the risk of ownership (as explained above).

For those of you that love lists, here are some of the potential high points of going public:

  • Raising money – more growth potential!
  • Companies can use their own stock to acquire other companies (in lieu of cash).
  • If the stock is listed on an exchange, this can potentially attract large institutional investors or fund managers that can help boost the value of the stock.
  • Advertising & Marketing! News of an IPO and stock news builds brands, reputation, and creates a buzz around the company.
  • Companies can use their stock as strong collateral to acquire debt financing.
  • Employee Retention & Recruiting – stock can now be used and offered to key employees to help with retention or recruiting new employees.

One word of caution for investors….though there are certainly a lot of companies that earn their way to going public and have proven track records, often times high risk (like tech startups) companies will go public in an effort to recover venture capital funds and profits, while the small guy who buys the stock ends up holding the bag when the shares become worthless.  This was a technique commonly exploited during the dot.com boom of the early 2000s.  Beware!

 

Dan Lucas
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