d. Why would a company consider going public? What are some advantages and disadvantages?
Randy’s, a family-owned restaurant chain operating in Alabama, has grown to the point that expansion throughout the entire Southeast is feasible. The proposed expansion would require the firm to raise about $18.3 million in new capital. Because Randy’s currently has a debt ratio of 50% and because family members already have all their personal wealth invested in the company, the family would like to sell common stock to the public to raise the $18.3 million. However, the family wants to retain voting control. You have been asked to brief family members on the issues involved by answering the following questions:
Going public is a process where a private company sells some of its stock to the general public through registration of securities with the securities and exchange commission (SEC), listing of securities on a trading platform and inviting the general public by issuing prospectus. Companies go public to have easy and quick access to equity capital and enhance liquidity of the firm.
Some advantages of going public are as follows:
Enhanced liquidity: When the general public is invited to invest in the company, it will bring more funds and enhance the liquidity.
Trading platform: Through going public, securities of the company are listed on a trading platform that enables it to raise capital while strengthening its structure and reputation.
Diversification: By inviting the general public for investment, a company can diversify its holdings by purchasing financial, physical and other assets through raised capital which in turn helps to increase production as well as generate high returns.
Reduction in cost of capital: With inclusion of more equity through public offer, a company can reduce the amount of debt in its capital structure and thus, reduces the cost of bearing debt.
Some disadvantages of going public are as follows:
Increase in cost: A listed company has to file regular returns with the securities and exchange commission (SEC) that increases the cost and manpower requirement.
Increase in risk: A listed company bears risk in the initial stages when its securities are not frequently applied by the investors.
Disclosure of accounts: A public trading company has to disclose its accounts and financial statements in public as per the requirements of securities and exchange commission (SEC).
Reduces ownership control: Inviting outside investors to participate in company's ownership dilutes the ownership stake of inside owners.
Going public is the process of converting a private company into a publicly traded company by inviting the general public to invest in securities of the company.
Advantages of going public:
It enhances the liquidity of the firm.
A firm can trade its securities on a recognised platform.
Going public helps to diversify the holdings of the company.
Going public reduces the cost of debt incurred by the firm for financing its debt.
Disadvantages of going public:
Going public increases the cost and formalities of filing regular returns.
A public company has to face the wide competition in the market.
A public company has to disclose its records widely to the public.
Going public dilutes the ownership stake of inside owners.