CFO Blog

    Often companies are restricted in growth by a lack of capital to invest into its operations.  Typically, a company will look to raise capital via the equity markets and/or debt markets to fund its growth initiatives.  However, raising capital is easier said than done, especially in a difficult economic climate such as the one we are currently in.  New investors expect a high rate of return on its investment, and as such your business must be poised for growth to capture the interest of potential investors. If your business fits this description, then an initial public offering of stock has a few significant benefits.     
    First, the sale of stock would help the company generate proceeds that it could use for acquisitions, expansion of product lines, pay down debt, or other capital requirements.  Secondly, the sale of stock allows the company’s existing ownership to cash out to an extent, while also allowing it to hold on to the level of ownership it wishes to retain.  Other benefits of an initial public offering are that it makes the company more liquid as shares are more readily sold on a public exchange. This is attractive for investors of the company because if gives them more flexibility for how long they wish to hold onto the investment and makes it easier to sell shares when they wish.  (Conversely, shares of privately held companies are often difficult to monetize for investors, thus making it a less attractive investment.) Another benefit is that the stature of being a publicly traded company would give your company more credibility among business partners and customer’s, because they would have the added comfort of knowing that the Company is complying with the stringent rules and regulations set forth by the SEC.  To this end, the company must make its financial statements readily available for anyone to analyze the health of.  Finally, yet another benefit of an IPO is that it increases a company’s net worth to the extent that cash is added to the balance sheet. This has a positive impact to a company’s credit profile which will make it easier for the company to raise additional capital via the debt markets in the future.

    An IPO also has negative attributes, namely current ownership will be giving up part of the voting rights of the Company to new shareholders who may have differing views of how the Company should operate.  A newly elected board of directors will now call the shots; however, often existing ownership will remain in control of the board.  New investors are not typically eager to change anything because they would not have invested in the Company if they felt that management was not doing a good job. However, in time if the investors get disgruntled they could make demands such as firing management.  Further, an IPO also places significant demands on a company’s accounting and auditing team as it now needs to comply with SEC reporting requirements such as Sarbanes Oxley, which privately traded companies are not bound by.  Being a publicly traded company truly does mean that you must completely open the books to the public including disclosing management salaries. 

    Having discussed the pros and cons of a potential IPO, other items must be seriously considered such as (1) How much money does the company wish to raise? (2) What percentage of the equity do you wish to retain? and (3) Is the timing right? These questions are specific to each individual company and must be considered carefully.

The Company Pulse, DC
analyst@thecompanypulse.com