What Does a Company Going Public Mean?
When a company goes public, anyone can buy a share of the company on the stock exchange.3 min read
2. Why Would a Company Want More Money?
3. Advantages of Going Public
4. Disadvantages of Going Public
What does a company going public mean? When a company goes public, anyone can buy a share of the company on the stock exchange. These companies are obligated to reveal their finances in a public quarterly and SEC filing.
IPO and What It Means for a Company
A company's IPO, initial public offering, becomes a public traded and owned business. Usually, it happens when businesses want to raise capital hoping to expand. If this happens, anyone can invest and become a shareholder.
When people say a company "goes public," it's when the company decides to go through an initial public offering. Since anyone can invest in the company, then it's called a public business.
When an investment bank or underwriter becomes legally responsible for the company shares and sells them to anyone, a company is considered public.
The ownership goes from a private to a public group, or the people who own the stock. Employees are affected because those who own the stock change and they make the salary and benefits decisions for instance.
The company wants to go public in order to expand and the price of the stock is largely dependent on management decisions, along with the financial position which is revealed each quarter.
Why Would a Company Want More Money?
A company may want more money because they need to accumulate savings, they want new investments or innovations and/or they want money to put into a new project.
For example, company A is worth $1,000 and wants to create $500. If it releases an IPO of 100 shares at $5 each it can have the money it needs.
Advantages of Going Public
- The capital base for the business is strengthened which makes it easier to buy, access debt markets and changes ownership.
- The company gets money that doesn't have to be repaid which improves its finances.
- The business now has access to a large amount of investment money which helps fund future expansion.
- The company becomes more well-known to consumers, which can attract top talent.
- Company stocks can be used to finance other buys (part of the price can be paid with stock).
- Stock options can be offered to employees as a nice way to compensate them.
- Since the company is in the public eye on a daily basis, the company valuation is thought about daily.
- Visibility and prestige increase.
- Shareholders may use their shares as collateral for loans.
- Publicly traded shares usually trade at a higher price than those that are not publicly traded.
- Shareholders can diversify their portfolio since their company shares are marketable.
- Management in public companies is usually paid at a higher level than those in private companies.
- If management wants to change positions, their resume is improved by being a manager in a publicly traded company.
Disadvantages of Going Public
- Management has less freedom to make decisions as they have to get the majority of shareholder approval for certain issues.
- Shareholders look at stock prices, profits and dividends as their way of judging management, who can change their strategies from long-term to short-term to satisfy shareholders.
- An initial public offering is expensive thanks to legal, accounting and registration fees and underwriter expenses.
- The SEC requires the public company to disclose sensitive information continuously such as finances and compensation.
- Financial statements have to be regularly audited by a public company.
- There are costs to create reports and statements that have to be filed in the agencies and distributed to shareholders.
- Management has to spend a lot of time creating the reports for the agencies instead of concentrating on company operations.
- Accounting and management systems have to be upgraded regularly.
- Management cannot own too many shares dues to insider trading, restriction of short sales and having their shares be considered restricted securities.
- If an investor or group of investors takes majority control, management can be fired from their positions.
- The information is no longer private. Everything the business does is going to be public which is good when good things happen and not so good when the company wants to hide something.
- Releasing an IPO is not a cheap thing to do. SEC filings do cost money.
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