Conditions for an initial public offering
Many business owners see the IPO as the ultimate achievement. While they have several benefits, their shortcomings need to be considered as well. Knowing the facts about IPOs can help you determine whether going public is the right move for you.
Before looking at the advantages and disadvantages of IPOs, you need to ask whether your company is ready. First, you have to be growing quickly enough to justify an initial public offering. Accelerating growth over several years is a prerequisite to being a contender in the market. You also will have a justifiable need for substantial funding and should consider the timing in the market by looking at how similar public companies are doing. On average, it takes one year to prepare the IPO, so you need to think about the performance of your industry when your offer is ready.
In Australia, a prospectus is a prerequisite for an initial public offering. This is an in-depth document that provides all the information an investor would need to make an informed decision about the investing in the business.
Advantages of an IPO
On the advantages side, an IPO is a way to raise large amounts of equity capital without incurring interest and needing to repay debt. It can help a company grow and develop, provide an objective share evaluation, build the company’s image and legitimacy – decreasing the cost of borrowing – and provide funds for future acquisitions. Business owners who take their companies public gain access to personal wealth because publicly-held shares usually trade higher than shares in private companies.
These advantages might seem irresistible, but they need to be balanced against the disadvantages of an initial public offering.
Disadvantages of an IPO
One of the big disadvantages of an IPO is a loss of control. Going from an entrepreneurial focus and being in control to being accountable to outsiders who want to see investment gains can be challenging. You also lose control to the board of directors who may not like the way the company is being run. The share market will constantly evaluate how your company is run and reflect this in the share price.
Another factor is the time, effort and money to create the IPO. Estimates for putting together the pieces range from six months to over a year. These steps include creating a business plan, a corporate profile, financial reports and an organisational chart, and finding an underwriter to help you through the process. As mentioned, you will also need to create a prospectus which is a time-consuming task.
Underwriters are usually compensated with a percentage of the funds raised from the initial public offering plus options for buying a predetermined number of shares in the future. In addition, there are substantial out-of-pocket expenses for external consultants such as auditors, lawyers and investment bankers.
After the IPO has been completed, the company will have additional responsibilities. Regulatory bodies have stringent requirements for reporting. Ongoing additional costs include more financial staff and larger accounting fees for audits. Time and money need to be spent on investor relations and to create material for lawyers, bankers, underwriters and brokers.
Crowd-sourced equity funding – an alternative to a traditional IPO
In Australia, crowd-sourced funding is a new way for start-ups and SMEs to raise money from the public to finance their businesses without an initial public offering. With crowd-sourced funding, a company can raise small amounts of money from many investors through on an online platform. The crowd-sourced funding company that runs the platform performs the role of ‘gatekeeper’ to ensure that the company raising the money meets certain requirements. One of their roles is to analyse the company’s finances and conduct any research required to determine suitability as an investment. If approved by the platform, the next step is to find investors.
According to Australian regulations as outlined by ASIC, a single investor can invest up to $10,000 per year in a company through crowd-sourced funding. In exchange, the investor receives shares in the business.
Learn more about crowdfunding and crowd-sourced funding.
Making the decision on an initial public offering
Many small to medium companies have stepped up to the next level with an initial public offering. An initial public offering can enable you to raise substantial amounts of equity capital without incurring interest and needing to repay debt. In addition, it creates an objective market evaluation of your company, builds your image and legitimacy, and provides funds for future acquisitions. Despite these benefits, you need to consider the loss of control as well as the cost and time involved in going public.
