There are benefits and drawbacks to raising money through an IPO.
Ten Benefits of Issuing Initial Public Offering (IPO) for a Company are as follows:
Instead of selling the enterprise or taking on additional partners, the entrepreneur may decide to list it at a stock exchange.
This is done through an initial public offering (IPO).
An IPO is the first sale of the stock of a company to the public. Very often, an IPO is issued by a young entrepreneurial company, though a number of old companies, or even public sector enterprises come out with IPOs to access funds from the general public.
The following are the main benefits entrepreneurs seek when they decide to list their ventures.
1. Access to Risk Capital:
Most companies will find it difficult to raise equity from venture capitalists and other big investors.
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It is not just about lack of availability of potential investors. There may be investors available but they may not be willing to give a fair valuation to the entrepreneurial venture.
In such cases, it will be prudent to seek equity investment from the public who might be willing to value the company more generously.
2. Increased Public Image:
The public image of an enterprise also goes up once it has been publicly listed.
It gets more recognition from suppliers and customers. Also, it becomes easier to attract companies.
Moreover, banks will also be more willing to lend to listed companies than to closely held firms.
Labour laws in India permit issuing stock to employees even in the case of private limited companies. But, the laws make it very cumbersome and procedures are not very well designed to facilitate liquidity. In the case of public limited firms, it is very easy to set up employee stock option plans and motivate your employees.
4. Facilitates Mergers and Acquisitions:
As a publicly listed company, it is much easier to carry out mergers and acquisitions.
The processes get simpler and valuations are largely market driven.
The Purpose of an IPO
As such valuation does not remain an area of much concern.
Listing gives an opportunity to entrepreneurs to liquidate a part of their holdings. Also, if the venture has accessed venture capital in the past, listing gives an opportunity to venture capitalists to liquidate all or part of their holdings.
A lot of responsibilities go hand in hand with getting listed. Some of the major responsibilities that entrepreneurs face when their companies get listed are discussed here.
10 Benefits of Issuing Initial Public Offering (IPO) for a Company
7. Sharing Corporate Control:
The company can no longer be operated by the whims and fancies of the entrepreneur.
Now, there will be a board of directors, which will be responsible to the general shareholders. Management of the company has to be carried out transparently and in the best interests of the shareholders.
8. Sharing Financial Gain:
In a proprietorship, all profits go to the entrepreneur but in a publicly listed firm, the entrepreneur cannot take all the profits home. Profits have to be shared with all other shareholders through issue of dividends and bonus shares.
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9. Managing Shareholder Value:
Earlier there was no way for the entrepreneur to keep track of the daily changes in the value of his/her company.
In a publicly listed firm, there is a stock price, which indicates the value of the firm, and this keeps changing throughout the trading day. The entrepreneur will have to ensure that business decisions and company performance continually serve to enhance shareholder value.
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10. Sharing Strategic Information through Periodic Reporting:
Listing and reporting norms in India are amongst the strictest in the world.
The publicly listed firm has to periodically share information relating to past performance and future plans. In such a scenario, competitors can track the company’s strategic intent.