If a privately owned company is successful enough, it may have the opportunity to turn public. This decision is a monumental one. “Going Public” means a company will be able to sell stocks and shares, significantly expanding its growth potential. However, the company will also be subject new rules and concerns regarding its operations.
These can include financial reporting, insider sales restrictions and increased pressure to perform for the sake of stockholders. Going public is not a decision to be taken lightly, but companies that decide to make the switch find substantial benefit in doing so for a number of reasons.
Why Companies Go Public
1.) Increase cash and liquidity
The promise of increased liquid assets is one of the most significant advantages of going public. When companies sell stocks, their funds subsequently increase. The money received from these transactions enables companies to further pursue a number of goals, PricewaterhouseCoopers (PwC) explains. Some of these goals may include increasing their working capital, investing in company infrastructure, developing research initiatives, retiring debt or expanding the business.
2.) Better credibility and brand strength
Going public can be a valuable move to improve a company’s prestige and reputation. PwC provides the example of a regional company finding it easier to expand into a national market due to its increased visibility. When companies are listed on the NYSE or Nasdaq, their name prominence contributes to indirect advertising both for them and the goods or services they offer.
3.) Increase market value
A company’s worth is measured in more than just cash holdings. Other forms of wealth include its fund liquidity, whether information about its finances and operations is publicly available and how easy it is for outsiders to determine its value. (Private companies, by default, lack these characteristics). If the owners of a publicly traded company decide at any point to sell it, these traits will add overall value to that sale. In fact, Entrepreneur reported “the public companies that compose Standard & Poor’s 500 are valued at about 17 times their earnings … while private companies are typically bought and sold at one to five times cash flow.”
4.) Attract personnel
High-quality managers and personnel can be difficult to find in any industry. Companies looking to attract and keep the best employees may find that using stocks as incentives can help them remain competitive as an employer. Companies may offer stock option plans, for example, as a perk with unlimited earning potential.
5.) Collateral acquisition
Instead of selling their own business, publicly traded companies may someday decide to merge with or buy other companies. Stocks are sometimes used as part of this payment. This practice frees up the company’s liquid funds for other endeavors.
Taking a Company Public and Leading Success
Taking a company public can be a sound choice for the health and growth of a business. However, companies need professionals with high-level business knowledge to steer the way. Point Park University’s online Master of Business Administration program prepares students to thrive in the areas of management, finance, sales, investments, international business and beyond.