If you own a business, you probably already know that you must find ways to have funds. You need to support your business through capitals. However, aside from your company’s profits, where would you get those much needed funds? The most common answer would be by going public. But there are disadvantages in going public.
Basically, when you go public, you offer the company’s shares for sale to the public. You must first be listed in a stock exchange.
Going public allows you to raise huge amounts of money. The money would come from investors.
Going public gives you a lot of advantages, that’s why it’s quite a common target for many startups and small-to-medium-sized companies. These companies have other reasons, too. However, there are also some disadvantages that you have to think about before jumping in the public trading. Read on!
Going Public is Expensive
Before you can go public, you must dish-out a tremendous amount of money. It is also time-consuming.
A corporation needs to put its transactions in order, aside from preparing reports and disclosures. All of these should comply with the US Securities and Exchange Commission’s regulations.
Consequently, you have to have people do some legwork in order to accomplish these tasks. You will have to tap a specialist’s skills. You will need those skills to guide your company through the whole process of going public. Attorneys, accountants, and underwriters are among these specialists.
Going Public Involves Equity Dilution
When you go public, you must realize that you are selling ownership of a part of your company to strangers.
Each and every slice and bit of ownership you sell comes out of your position.
In other words, going public doesn’t guarantee that you’ll raise the amount of money you need. You may be able to reach your target, but you won’t keep 51 percent of the company. That happens.
Going Public Means Loss of Management Control
When you go public, management rarely stays simple. It almost always becomes complicated.
That means you cannot make decisions all by yourself. What if you are a majority shareholder? That won’t work, because the minority always has a say in how to manage your company.
Moreover, you will have to give up total control over the board of director’s composition. Federal law places limits on board composition. Why? They do it to ensure the independence of the board from inside influence.
Going Public Requires Increased Regulatory Oversight
Going public also means that your company will be under the scrutiny of regulators. The SEC or other regulators of public corporations will supervise your business. That includes the stock exchange that listed your company’s stock.
Needless to say, you will have to adjust and change the way you manage the business. You should be aware of all their requirements and policies.
Going Public Needs Enhanced Reporting Requirements
When your business hasn’t gone public yet, you can keep your internal business details private. No one can freely look at it. Meanwhile, when you go public, you must make quarterly and annual reports.
The reports will cover your business operations, the condition of your finance, the compensation of directors and officers, and other things.
Simply put, you lose a great part of your privacy rights when you go public.
Going Public Gives You Increased Liability
Just like any matter open to the public, the potential liabilities of your company increase.
The company, its officers, directors, and other people involved will see their liabilities for mismanagement grow.
According to the law, a public company must make sure that its shareholders can maximize profits. They must disclose information.
As a result, the company and its officers can be sued for self-dealing. Regulators ca also sue them if they misrepresent materials to shareholders. Additionally, they can be sued for omitting information that federal laws require.
On the other hand, these disadvantages don’t tell you to avoid going public. On the contrary, they tell you to enhance everything about your company. Because going public means your company has already made a name for itself, it must be one of your top goals.
Going public is a big milestone for companies, and you simply have to be extra careful. Knowing these disadvantages prepares you for a tougher competition.
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