Taking a company public is like making it to the Olympics in the business world. To many entrepreneurs, chief executives, and business leaders, listing their companies on the public stock exchange is an achievement that they strive for and marks a highlight in their careers.
Listing a company successfully on the stock exchange is not a short journey, and requires sustained excellence and commitment from all members of the company to the business. While the journey to becoming a public listed company begins with a vision, the vision needs to be worked on consistently and effectively by every part of the business machinery over many years, which may last up to a decade or more. Buy-in throughout the company is crucial, from board members down to individual employees within each business unit. In addition, various regulatory and market requirements need to be met before a company qualifies to be listed.
As a chief executive and business leader, your motivations for taking your company public needs to be sure and clear; otherwise, you may ultimately find the public listing journey to be frustrating and disappointing, not to mention an expensive one. To help you solidify your expectations, let’s discuss 5 legitimate reasons why companies decide to go public.
5 Reasons Why Companies Decide to Go Public
Reason 1. Raise capital to accelerate existing business growth or seize otherwise unattainable growth opportunities.
If you have ambitious growth plans for your business and they require substantial amounts of capital to materialize, taking your company public provides you access to public funds which are more cost-efficient compared to traditional financing. During your company’s initial public offering of the shares that have been offered for sale (plus the issuance of new shares, if any), initial capital is raised when investors subscribe to your shares. In addition, your public company will also be able to raise additional capital in the future, such as through the issuance of additional new shares, which can be done relatively easily.
The capital raised from a public listing exercise is interest free (hence more cost-efficient compared to traditional financing); however, investors will expect dividends in return for the equity they have invested in your company.
Reason 2. Enable existing shareholders to unlock the value of their investments they’ve put into the company.
If you’re a business owner and have invested your time, energy, and money into building a successful business, taking your company public lets you realize your investments beyond the company’s profits. There are several reasons why this could be important to you.
Firstly, as a savvy businessman, it should be natural for you to maximize the return of any investment, not to mention the investments you’ve put into your company. Taking your company public enables your company’s future upsides to be monetized, which a small, medium, or large private business (SMLB) will find challenging to do. The true value of your company, indicated by the market capitalization value of your publicly traded shares, can be several times higher than your company’s book value.
Secondly, as your shares are valued in the public market, taking your company public also makes it easier for you to sell your company, if you desire to do so. Selling a SMLB to private buyers or investors is possible, but you’ll likely have to part with your company at a lower value that is determined by the willingness of the purchasing party, due to the risks and liabilities associated with a private limited company.
Reason 3. Reward or remunerate your company’s employees for their loyalty, sacrifices, and efforts put into building your company.
One of the best ways that you as a business owner can reward your staffs’ contributions to your company is to share your public listed company’s success with them. This can be particularly meaningful for the pioneer staff who have stood by you through thick and thin. An initial public offering exercise allows your staff to subscribe to your company’s shares (or to be subscribed on their behalf) via what is colloquially known as the “pink form”.
There are many advantages for employees to become shareholders of your company. For one, employees are now truly invested in the company, where their efforts are contributing directly to their own wealth, which can grow quickly as the company’s stock value rises—think of the many millionaire employees working at Apple as a good example. However, the inverse is also true: falling prices will diminish employees’ wealth. Nevertheless, in either case, taking your company public raises the incentives for your employees to work hard while providing them the satisfaction of building their own futures with their own hands.
Reason 4. Enhance the profile of your brand in the eyes of your customers and business partners.
Being a public listed company is an accreditation in itself. It signals to the market that your company is trustworthy, credible, and a market leader in its own right. This raises your company’s brand in the eyes of your customers as well as your brand’s public awareness, due to the heightened media coverage and publicity that comes with an IPO, which you can and should capitalize on to deliver greater value to your customers.
Public listed companies have more doors opened to them as well. Smaller companies will approach to explore collaboration avenues more frequently. Opportunities for partnership with other similarly established companies or even larger companies becomes easier, which can lead to new ventures and are great for increasing share value.
Reason 5. Attract the best talents in the market which would have been difficult for an SMLB to do.
The best talents like to work at the most successful companies, and a public listed company wears like a badge of success. While the inherent growth opportunities accessible to the public listed company but not the SMLB mean that remuneration packages are typically more competitive in public listed companies, the attractiveness of working on industry leading projects, exciting opportunities, and overall brighter career prospects are significant and cannot be overlooked. Subsequently, this also implies that while the best talents are available to public listed companies, retaining their services is still dependent on the company’s growth prospects.
By this point it should be clear that while the advantages of going public are numerous, the inter-dependencies to realize each advantage to its fullest require greater attention and may often ask even more of the chief executive or business owner’s time and energy—we will explore more of this in the next article of this series.
Regardless, getting your reasons clear for taking your company public is a critical exercise, as they will form the motivation to push you through the next chapter of your company’s journey. While you can be proud of listing your company, it will feel many times worse to see your stocks languishing at the bottom of the board, rueing whether all the additional responsibilities, scrutiny, and pressure that come with a public listed company are worth it after all.