Disadvantages of an Initial Public Offering

By Shannon C , last updated February 5, 2012

"Going public" and issuing an IPO, or initial public offering, is a big decision for a company to make, and comes with significant advantages and disadvantages attached. As the IPO is released, the company's status will change from a privately held company to a publicly owned company, which means that instead of a few hand-picked investors who are also owners (and many times operators) of the company, the company now receives its investment funding from many investors, sometimes hundreds or even thousands. Learn more here about the advantages and disadvantages of an initial public offering.

The Advantages of an Initial Public Offering

The major advantage of an initial public offering to a company is the ability to take in additional funding to grow and expand business operations. "Going public" doesn't mean that the company's ownership relinquishes all ownership control of the company and often having additional funding can lead to further acquisitions, new research, better re-investment options for the company's own fund managers, and a greater reach for marketing and promotional efforts as well.

The Disadvantages of an Initial Public Offering

The disadvantages of an initial public offering, however, are often just as significant, and bear careful consideration before a decision is made. Often the first and most significant barrier to entry is simply the cost of going public, which can range upwards from a quarter of a million dollars to over a million dollars and higher. Additionally, a publicly owned and traded company is subject to much greater scrutiny and disclosure requirements from the federal government, and failure to comply with transparent business practices and financial accountability can come with stiff penalties not just in the financial realm, but also legally through civil liability lawsuits.

Public companies, with the requirement to provide details of the intimate financial picture of the company itself, are also more vulnerable to acquisition by other companies. They are also more vulnerable to the ups and downs of the publicly traded marketplace, which can increase or reduce the share price of their stock based on the movements of stockholders and the daily market reports. Keeping shareholders satisfied with their investment can also cause the management of a publicly traded company to overlook important long-term strategizing activity in favor of ensuring that share prices remain high and attractive to current and potential investors. This short-sighted attitude can cause great harm to a company over the long term if allowed to continue.

How to Decide to Issue an IPO

The only way to properly evaluate whether issuing an IPO is the right next step is to sit down, preferably with an independent consultant, and do a thorough analysis of all the ways an IPO may affect a growing company.

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