There are several benefits for a business to "go public" with an initial public offering:
- Cash - A successful IPO can generate a very large sum of money. Of the 278 IPOs offered between 2001 and 2003, the average deal size was $316 million and the median size was $106 million.
- Liquidity for employees - This is particularly important for technology and life sciences companies, where providing incentives to the most highly qualified prospective employees is critical. In the wake of the Enron scandal and other examples of executive overpay through stock options, this may be undergoing significant change. Consult an attorney about using an IPO for this purpose.
- Liquidity for investors - Investors are always looking for a way to receive a higher and faster return on their investments, and an IPO is one good method of achieving that. Timing and restrictions on selling are very important here to avoid a speculation bubble.
- Creation of a currency for acquisitions - Stocks may be as valuable as cash for acquiring other businesses. Stocks are also a good way of minimizing tax liability in a way that cash cannot.
- Access to the public market - A company that has completed its initial public offering may return to the public market for future financings in follow-on offerngs. Using an IPO establishes a relationship with underwriters, financial analysts, and investors.
- Enhancement of the company's stature, perceived stability, and competitive position - One effect of an IPO is the credibility of a company's fame, staying power, and place in the competitive market. This often helps to get good results with hesitant buyers and lenders. The media is also much more likely to provide publicity to a public company than a private one.
- Enhancement of the company's market value - A successful IPO exposes the company to a broad base of investors, some of whom may have been unaware of the company or unsuited to purchase its stock. This exposure usually increases the demand for the company's stock, increasing its market value.
What Are the Disadvantages of an Initial Public Offering?
Some of the burdens a business can experience with an initial public offering include:
- Distraction of management from operation of the company - The offering process usually takes three to five months and includes tasks that simply must be performed by management, such as the selection of investment bankers, presentations, and drafting sessions.
- Restrictions on publicity and marketing - The Securities and Exchange Commission (SEC) forces companies to have a "cooling off" period in which the company is not allowed to publicize its impending IPO, which could lead to overhype. During this time, marketing activities must be done with a constant eye on securities law.
- Compliance with SEC disclosure and reporting requiements and the Sarbanes-Oxley Act of 2002 - Once a company goes public, it is subjected to a whole host of strict and intrusive disclosure laws. Corporate governance, accounting, and in-house counsel will almost certainly need to be beefed up and modified.
- Reduced flexibility in corporate affairs - Again, extensive new laws have been placed that force a company to disclose much more information and to allow stockholders to vote on many more issues. These reduce the flexibility of management to conduct business as it sees fit and often slows the company's corporate activities to nearly a standstill.
- Exposure to class action securities litigation - Public companies face increased exposure to lawsuits for securities fraud, particularly when a major announcement of bad news is given. Class action suits may take years to resolve and may result in the loss of millions of dollars.
- Loss of control - Upper management and the founders of the company will lose a great deal of control as more issues are voted on by stockholders. This may interfere greatly with an existing business plan.
- Vulnerability to a hostile takeover - If insiders do not hold a significant percentage of the company, this vulnerability is especially real.
- Expense - In addition to taking several months, the cost of going public has also risen dramatically. In 2003, the average cost of an IPO including legal, accounting, printing, transferring, and underwriting fees was more than $3.5 million. This creates a much riskier environment in the term after the IPO when employees may sell their stock or the company may disappoint investors.
Do I Need an Attorney for My Business Initial Public Offering?
Definitely. An initial public offering is highly profitable but also very risky. It is also an extremely complicated process that requires good timing and a knowledge of the road ahead. An experienced business attorney can help through all stages of the initial public offering.