For those who are uninvolved in the investment sphere, the terms “going public” and IPO may mean very little. However, for business owners and shareholders, a company going public could mean expansion is on the horizon. Regardless of the outcome, companies usually go public to raise capital.
Initial Public Offering (IPO)
Quite simply, an IPO refers to the process by which a company offers its shares to the public. This process likely will not occur during the company’s early days of existence. Initially, shares are distributed among the original founders, owners, and partners. Typically only after establishing the company and achieving a solid foundation in terms of clientele and finances will they consider going public.
By offering up some of the company shares for sale, the company stands to raise a large amount of money in a short period of time provided there is enough interest among investors.
Advantages
Going public has a number of advantages beyond simply attaining more capital. By expanding its shareholder base, a public company can increase its prestige and diversify its ownership, making the company more valuable overall. Going public can also attract more employees if the company decides to compensate individuals in certain positions with stocks in addition to their regular pay; shares in a public company can also be sold fairly easily, making the prospect even more attractive.
Challenges
Though there are many benefits to a company going public, they will face some challenges, as well. While the company strives to attain capital, there may be strain placed on the company’s current finances. Depending on the methods used to increase the value of a company’s shares, increased risk and instability may occur as a result. For companies going public, it’s important to navigate such risks with caution and to assess the company’s stability and financial situation prior to engaging in any high-risk practices.
Additionally, by making the company public, the leaders of the company may lose some say in what direction the company goes. This may prove to have a positive effect if shareholders can provide valuable insight into business practices, but it is important to keep in mind regardless of their input.
When a company goes public, they often strive to acquire more capital, expand their business, add to their savings, or fund new ideas. The process of going public presents some risks, but for many, the benefits far outweigh the challenges.