A lot of privately owned companies had gone public ever since the start of the stock market exchange. We can’t deny the numerous advantages that come with becoming a public company – from generating additional cash to indirectly promoting the brand. We have recently talked about the 5 common reasons why companies decide to go public. In this article, we are going to talk about the pros and cons of becoming a public company, as well as the overall Initial Public Offering or IPO process.
What does it mean to go “public”?
Going “public” means going through an Initial Public Offering or IPO process. It means that the company would be listed in a stock market exchange, wherein the public is free to buy and sell its stocks. It will no longer be considered a privately owned company with a relatively small number of shareholders. There are several pros and cons of becoming a public company. The following are listed below:
- Greater access to additional capital by generating cash from selling stocks
- Indirect brand advertising on public exchange markets
- Attract potential employees through stock holdings incentives
- Help facilitate acquisition by using stocks as a form of currency
- Loss of complete control over the company for the original founders and investors
- Responsibility to pay large legal, accounting, and marketing costs
- Public dissemination of some sensitive information like products, plans, and financial reports
- Strict implementation of additional legal and regulatory rules
The Initial Public Offering process
Not all companies are eligible for an Initial Public Offering. Companies are thoroughly screened, prepared, and undergo multiple processes before they could transition from private to public. Here is a simple overview of the processes that a company must undertake in order to become public:
For starters, the company must generally have strong management capabilities. This is important to ensure that the company could deliver the complex financial and accounting requirements of the governing body that overlooks companies that are included on public exchanges. It is also necessary to make sure that the company is healthy enough for the public to invest in.
The next step is to involve investment bankers. These bankers are invited to make a thorough analysis on the company, to see if it’s fit to become a public company. It also helps in determining the estimated valuation of the company.
Afterwards, the company continues to submit the necessary files to the governing body with the help of lawyers. These files include everything about the company that the public needs to know. Once the file is registered, the company will be subjected for the review process, wherein the governing body would determine if it passes the standards for becoming a public company.
When the registration is accepted, the road show for the company begins. It is called a “road show” because it technically shows off the company on the road. It involves meeting prospective investors, and advertising the company in order to sell off on its IPO.
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Once there are investors waiting for the IPO, it is time to release a price. Usually, the board of directors determine the price through a pricing committee composed of underwriters, who will set a price for the established stocks in which all selling stockholders will agree upon.
When the IPO is completely established, the underwriters are paid back by the company through discounted prices of stocks, and then proceeds to sell the remaining stocks to the public. This is when the company begins its new life as an official public company.
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