Key Takeaways

  • Going public provides significant advantages, including easier access to capital, increased prestige, and liquidity for shareholders.
  • Additional benefits include stronger market valuation, enhanced acquisition opportunities, and the ability to attract and retain top talent.
  • Disadvantages include higher costs, increased regulatory burdens, loss of privacy, and slower decision-making.
  • Companies must carefully weigh both the benefits of being a public company and the long-term challenges before pursuing an IPO.

While the benefits of being a public company can be many, it is not a decision that should be made quickly, or without considering all the advantages and disadvantages. Making the decision to go public can be a complicated, time-consuming, and expensive process that will alter the way the business is run.

Advantages of Being a Public Company

A small business that has a good probability of continued growth may have to decide between continuing to be a private company or transitioning to a publicly owned one. There are many advantages to doing this including:

  • Ability to Raise Capital - Publicly held companies are able to raise capital by creating and selling shares. Unlike loans, money from shares does not need to be repaid. Shares can also be used as compensation for employees, increasing employee morale. If the company does well, they will benefit also.
  • Create a Capital Influx - Initially, businesses generally sell a large number of shares when they go public, which can cause an influx of capital. This money can be used however the business would like, as long as it falls within the stock prospectus guidelines.
  • Increased Prestige - Investors, financial institutions, customers, and employees may see the company as a larger player in the industry as a public company as opposed to if it is a small, privately owned business. Increased recognition can also provide free advertising and public relations for a business, providing opportunities for growth as more people learn of the company and their brand.
  • Tax Concerns - Utilizing business stock for acquisitions lowers the need for cash, instead allowing businesses to complete a transaction without using IPO proceeds for continued growth. Acquisitions made with stocks as consideration may be seen as "tax-free" reorganizing, allowing the business to defer the tax on any gains from the business sale.
  • Grant of Options - A public company can also use its stocks to compensate existing and future employees and officers via directly issuing stocks or grant options. This allows potential employees and management the opportunity to benefit from a business's success.
  • Liquidity - An IPO can provide liquidity to a business' employees, pre-IPO investors that hold company stock and founders. While pre-IPO investors may not be able to liquidate their stocks immediately, due to underwriters imposed "lockup" requirements and additional rules of the SEC, there is future monetary value to their stock.

Enhanced Valuation and Market Visibility

Public companies often enjoy higher valuations because their shares are traded openly, making their worth more transparent. Investors and analysts regularly evaluate financial statements, which can boost investor confidence. This visibility can also create momentum in the stock price if the company performs well. Being publicly traded can position the company as a leader in its industry, providing credibility when negotiating contracts, partnerships, or joint ventures.

Attracting and Retaining Talent

Stock options and equity packages are powerful tools for attracting high-level executives and retaining employees. Public companies can offer employees ownership stakes that tie compensation to company performance, which boosts loyalty and aligns interests with long-term growth. In competitive industries like technology and biotech, equity-based compensation is a major advantage when recruiting skilled workers.

Acquisition Opportunities

Being public allows companies to use stock as currency in mergers and acquisitions. This flexibility can make acquisitions less cash-intensive and facilitate faster expansion into new markets. In many cases, target companies are more receptive to offers from public firms due to the perceived stability and liquidity of stock transactions.

Disadvantages of Being a Public Company

There are many formal legal requirements associated with creating a publicly owned company. In addition to the financial costs associated with the change, the amount of time required is also significant while a company's management team works on establishing an IPO.

Businesses must also adhere to strict regulations and controls as a way to protect the interest of an average investor. These can prove to create some disadvantages in deciding to become a public company, such as:

  • A Required High Level of Transparency - A limited company, regardless of if it is private or public, will have a greater amount of their information available through Companies House. A higher transparency level is required, though, for a company that is publicly owned.
  • Increased Governmental Control - The number of regulations and rules associated with the daily operations of a publicly owned business is greater than those required for privately owned companies. Flexibility in operating the business is also usually decreased.
  • Slower Decision Making Time - With more people involved in decision making, the entire process can take more time than before. While many decisions can be made by the Board of Directors, some also require shareholder approval as well.
  • Low Motivation - Limited public companies have different management and ownership. While a company is run by the Board of Directors, the shareholders are the only ones that see profits. With no direct line between rewards and efforts, there is little, if any, incentive for the Board of Directors.
  • No Secrecy - There is no secrecy for a public limited company. They have to have their accounts and financial details published regularly, allowing their information to be seen by anyone, even a competitor.

High Costs of Compliance and Reporting

Public companies face ongoing costs related to compliance with the Securities and Exchange Commission (SEC), including filing quarterly and annual reports, conducting audits, and maintaining investor relations staff. Additionally, there are expenses for legal counsel, underwriters, and accounting firms. These recurring costs can be substantial, especially for smaller firms, and must be factored into the decision to go public.

Loss of Control and Vulnerability

Once shares are traded publicly, company founders and original owners may lose some control over strategic decisions. Shareholders can pressure management to prioritize short-term profits over long-term goals, and activist investors may attempt to influence governance. There is also a constant risk of hostile takeovers if ownership becomes too diluted.

Frequently Asked Questions

  1. What are the biggest benefits of being a public company?
    Access to capital, enhanced prestige, liquidity for shareholders, and the ability to use stock for acquisitions or employee incentives are among the most significant benefits.
  2. How does going public affect a company’s valuation?
    Public trading often increases valuation due to market transparency and investor confidence, though valuations may also fluctuate with market conditions.
  3. What are the main drawbacks of going public?
    High compliance costs, regulatory scrutiny, reduced privacy, slower decision-making, and loss of control are the main disadvantages.
  4. Can public companies use their stock for acquisitions?
    Yes. Stock can be used as currency in mergers and acquisitions, reducing the need for cash and enabling faster expansion.
  5. Is going public right for every company?
    No. While the benefits of being a public company are substantial, smaller businesses or those not ready for scrutiny may find the costs and risks outweigh the advantages.

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