Before we begin to assess the benefits of launching IPO, we must understand why a company goes public. When a company is in need of new investment, it can choose to sell the shares on a stock exchange. Under initial public offering the company sells its shares to the public investors through the stock exchange. The corporation shares the part-ownership of the business with the public. You can say that it is the transition of a private company to a public one.
A company goes public to raise money from new public investors for the future growth. A private shareholder might want to sell their stake to raise the funds and augment to company’s repute in the market. Listing the shares in the market makes it easier for a new investor to buy company shares; in case you want to sell a couple of years from going public. Initial public offering makes it easier for the initial investors and the founders of a company to sell the shares in the market through block trade.
There are several benefits of allowing the public to invest in your company. Some of these pros are lucrative enough to incentivize you to overlook the cons of the process. We have chosen the seven most important advantages of a company listing with the stock exchange.
Better payment for the employees –
The employees often receive better incentives after an IPO. It helps in boosting employee motivation and worker retention. While stock options are risky since a business faces several unfavourable conditions that can mar its success. It might be possible that the company never reaches the liquidity it wishes to reach. However, a public company has to make its prospectus public for the investors, who can peruse the investment plans and decide to put their money on the company shares. A public company can easily sell their shares through the stock market.
Enhanced public image –
The public image of a company improves once the stocks go public. It turns from another private corporation to a reliable public company that garners more recognition from the suppliers. Moreover, banks prefer lending money to public corporations that have listed their stocks with the stock exchange, rather than lending to closely held operations.
Chance to raise a respectable capital –
Most of the times, the private companies will have a tough time raising equity from potential investors, venture capitalists and big investors. There are quite a few big investors in the market, but none of them want to risk investing in a closely held firm. It results in undervaluation of the company shares. Seeking investment from the public is a smarter move since going public provides a better opportunity of raising necessary funds.
Employee motivation –
The Indian Labour Laws have made it straightforward for private firms to issue stocks to their employees. Even though the process is a little cumbersome and the procedure is complicated, the end result is more than rewarding. Once your employees become the part owner of the company, there is a higher chance of them performing better. Turing your business employees into part shareholders of the company will motivate them towards high productivity.
Facilitation of acquisition and merger –
When a company has public listings, it is much easier to merge with new companies and acquire new businesses. The process becomes simpler once the owners list a corporation at the stock exchange. The valuation method becomes a lot easier since the process remains exclusively market dependent.
Chances of liquidation –
Most companies enjoy higher chances of liquidation after they declare initial public offering. IPOs give the opportunity to the invested venture capitalists to liquidate their shares or parts of it. Interestingly, it also means that the investors have to shoulder some of the investing decisions and business operation responsibilities. After going public there is a significant dilution of the corporate authority and the new shareholders have important say in the management of the company.
Managing shareholder value –
When the company is private, there is no way for the business owner to find out the daily ups and downs of his or her company values. Once a company launches IPOs, the shares dictate the market valuation of the company. Listing with a stock exchange has several advantages and this is definitely one of them. An entrepreneur can keep track of his or her market value while sitting at home, even when the value keeps changing throughout the day.
Although it seems lucrative to almost all companies operating privately right now and India has recorded the global highest number of IPOs in the first half of this year, it might not be the best decision for all private companies. The January to June period in the Indian share market saw the about 90 public companies raise close to 3.9 billion USD. It speaks strongly for the IPO investment trends in India and the opportunities awaiting private firms ready to brave the technicalities of the process.
India has some of the strictest IPO laws and regulations in the world. The process is quite expensive and a bit daunting. Therefore, it would be fallacious to believe that all companies profit equally from the IPO trend. You should note that out of the 90 companies that went public and raked up billions, only 15 were listed with BSE and NSE, representing over 93% of the total proceeds. So, even if you have enough reason to believe that you are ready to go public, you need to speak with a litigation expert, a business accountant, an auditor and other contemporary public business owners to recheck the viability of your ambition.