Going public. That’s the milestone of success that many entrepreneurs salivate over. Fame, fortune, prestige and power can all follow a successful initial public offering.
However, that doesn’t mean every business should aspire to become a publicly traded company. Inc. editor Elizabeth Wasserman stresses that there are many elements of an IPO that businesses need to examine before deciding to pursue one. These include:
- Ability to meet the financial qualifications of various exchanges
- Market receptivity to companies going public in the general market as well as within your particular industry niche
- Usefulness of an IPO strategy for your business and business goals
- Matching the financial profile of most successful public companies — an annual 20% growth rate and the potential to make an annual revenue of hundreds of millions of dollars
If you can meet these criteria, an initial public offering might be worth pursuing. To better help you make your decision, consider these perks and downsides to an IPO:
Perks of an IPO
- Financial Reward. It’s probably the main reason going public is so enticing — a successful IPO can make you into a millionaire or even a billionaire. After years of hard work, employees, executives, investors and partners can see their labor become liquid gold.
- Stock. With your initial public offering, you can issue stock in your company. This not only monetizes the investments of private investors, but also allows you to raise funds without ever having to repay any of it back. Even after your IPO, you can issue secondary stock offerings to refinance and avoid borrowing money, says Entrepreneur.
- Securing Funding. If you do need to issue debt, being a publicly traded company gives you direct access to capital markets and allows you to get better loan rates from private sources.
- Prestige. A successful IPO is not an easy feat. Thus, companies that achieve this milestone obtain a level of prominence and power that few businesses ever reach.
- Attracting Talent. That prestige will often make your company a more attractive place to work, providing a better pool of potential employees. Plus, you can use stock awards to land and retain key employees.
Downsides of an IPO
- Time Commitment. It currently takes on average 11 years for companies to go public. During that time, a considerable amount of energy must be spent on advanced planning to ensure a successful IPO. Thus, you have to make sure that an initial public offering fits with the strategic priorities of your business, your partners and your investors, before you risk wasting any resources.
- Financial Burden. An initial public offering is not cheap. According to the US Small Business Administration (SBA), the fees and expenses of going public can reach six to seven figures.
- The time and financial burdens don’t stop after your company completes its IPO. By becoming a publicly traded company, you are subject to numerous US Securities and Exchange Commission regulations that cost a lot to follow. While these regulations make fraud less likely, they also make it more difficult for businesses with less resources to become public entities.
Completing a successful initial public offering is a significant milestone for any company. However, it’s important to be honest with yourself when deciding if becoming a publicly traded company is the best path for your business. As long as you are clear that going public aligns with the goals of your company and you have the growth, resources, revenue, and stamina to make it happen, the upside to an IPO can pay off tremendously.