Thursday, April 2, 2020

The Pros and Cons of Using IPOs



An IPO, or initial public offering, occurs when a company makes shares of their stocks available to the public. Essentially, it allows companies to trade some stake of ownership of the company to public stockholders. 

While this does mean that the owners of the company relinquish some control, it can open the door to exciting possibilities of growth and prosperity. There are plenty of advantages and disadvantages of a company deciding to go the route of using IPOs. Here are some examples below...

PROS OF IPOs


Opens Up Capital for Additional Ventures


Usually, when a company launches an IPO it means they are in a period of sustained success (or else there would be no incentive to sell). However, it also functions as a way for the company to launch into a more aggressive period of growth that can lead to long-termed stability. 


By selling off shares of the company, it creates a massive cash influx that can do a variety of things, whether that is launching new expansions of the business, purchasing new acquisitions, or paying off old debt that opens the company for future endeavors.

Opens Up Higher Potential for Talent


Another way that IPOs can help companies grow is by using the shares as a means of attracting higher talent to the business, both on an operational and executive level. A company undergoing an IPO can offer stock as an incentive to attract personnel that might normally be beyond their price range at the current moment. 




This helps companies punch higher than their weight class while they grow. This is appealing to potential employees because the payout when they sell their shares later might be far more valuable than the initial higher salary they would have received.

Allows for a Major Payoff for Owners


The money that is used to buy shares goes to two different places: back into the company or into the pockets of people who own the company. These owners might be managers, founders, high-level employees, or private investors who have equity in the company. 


While salaries and dividends have provided a financial benefit to the investors for years, the IPO is the major payday for many businesses. An owner of a company that is going public can make millions of dollars during an IPO.

CONS OF IPOs


IPOs Take Valuable Resources


Launching an IPO is a major stepping stone for a company, but it isn’t without its share of hard work. The IPO process takes a ton of time, during which the executives and high-level decision-makers of a company are highly involved. 


This takes away time that could be spent on other business ventures and building additional revenue. Third-party investment firms are also brought on during this time, to help undergo the complex IPO process. These companies cost valuable time and money, so there is a major initial cost of capital upfront to launch an IPO.

Potential Roadblocks with Owner Shares


If an owner wants to retain control by taking shares of their company for themselves, there may be potential roadblocks. Oftentimes, there are stipulations against this. And owners who do get shares of the company must sit on them for a long period of time since an owner selling shares of the company can have a negative impact on the value of the stock, which hurts other investors.

It’s also worth noting that even if an owner is still running the company after an IPO, their control isn’t always secure because they are answerable to a Board of Directors, who can fire them at any time. For all its benefits, it must be understood that there is a significant loss of control that comes with an IPO.



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