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Faced with tighter borrowing requirements, more small to medium enterprises are considering all the options. One of these is ‘going public’ with an initial public offering (IPO).

Many business owners see the IPO as the ultimate achievement. While they have several benefits, their shortcomings need to be considered. Knowing the facts about IPOs can help you determine whether going public is the right move.

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 IPO. Accelerating growth over several years is a prerequisite to be 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.

Advantages


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 - hence decreasing the cost of borrowing - and provide funds for future acquisitions. Business owners who list their company 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.

Disadvantages


The big one is 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 to 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 for six months to over a year. These steps include creating a business plan, a corporate profile, financial reports and an organisation chart, and finding an underwriter to help you through the process.

Underwriters are usually compensated with a percentage of the funds raised from the IPO, 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, legal assistants 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 needs to be spent on investor relations and to create material for legal representatives, bankers, underwriters and brokers.

Alternatives


A direct IPO is one alternative to a conventional IPO. In the United States, for example, businesses can sell shares online by filing a Small Corporate Offering Registration (SCOR). While there is minimal external review and oversight required under this process, backing up your case with audited financial statements will make it easier to sell your offering on the open market. A major disadvantage of the direct IPO is the time and effort required to sell the shares, and the risk that you might not be able to sell them.

Many small to medium companies have stepped up to the next level with an IPO. 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 valuation of your company, builds your image and legitimacy, and provides funds for future acquisitions. Against these benefits, you need to consider the loss of control, as well as the cost and time involved, in going public.