There is a lot of hype surrounding the urge to go public.
Spurred on by investors and other motivating factors, many entrepreneurs aim for an IPO from the outset of their company. Not surprisingly, a large number of startup business plans include the long-term goal of a public offering.
But these days, there are growing concerns about whether an IPO is a viable or even healthy option for most companies. The re-privatization of publicly traded companies seems to be more commonplace, largely because the disadvantages of going public are becoming more apparent than ever before.
There are undoubtedly some advantages to an IPO. But determining whether those benefits outweigh the increasingly long list of disadvantages is something each company needs to decide for itself. Our list of the disadvantages of going public can help launch the internal debate in your company.
- Regulations. Publicly traded companies are subject to intense regulatory scrutiny. As a public company, you will be required to maintain a steady stream of SEC filings. You'll also fall under the legislative provisions of the Sarbanes-Oxley act of 2002. This legislation requires senior management to certify the accuracy of audited financial statements and holds them accountable for misrepresentations.
- Confidentiality. Public companies are required to disclose much more information than private firms. If you aren't prepared to disclose information about your company's operations, policies and stockholders, then an IPO is not an attractive option.
- Control. Once your company goes public, you will lose much of the control you enjoyed during the days of private ownership. Investors and public companies pony up capital based on the assumption that they'll have the collective power to influence management decisions and kick out key leaders whenever they feel its necessary.
- Liquidity. Ultimately, a public company gives founders and major ownership interests the ability to easily transition out of the business. But most IPOs come with provisions that prohibit exits for a specified period of time. Until the company has time to become established in the public sphere you will likely be prohibited from cashing out your primo stock deal.
- Expense. Few entrepreneurs realize how expensive it is to conduct an IPO and maintain a public company. The direct expenses alone can be overwhelming, comprising as much as 25% of the money you raise. Combined with the indirect costs of maintenance and compliance, these expenses can easily negate the financial incentives associated with a public offering.