For small companies that are growing extremely rapidly or for larger mid-sized companies that are growing very rapidly, it is possible that they can tap the public market for both debt and equity capital. When a company does this for the first time, it is called an Initial Public Offering or IPO.

There are several dozen firms in the country that help middle market companies raise financing through an IPO. The cost of this financing -- that is, the percent of equity sold for the amount of dollars raised -- is generally viewed as lower than other equity financing. This is because public capital is in greater supply than private equity and public shareholders receive greater liquidity in addition to more reporting requirements and participation on the board of directors. Since GoPublicToday.com. is all about taking companies public, we thought we would spend a little time discussing the advantages and disadvantages of going public here.

Advantages of Going Public

Lower Cost of Capital

A public company has more alternatives for raising capital than a private company. A private company, once it has exhausted its bank lines, generally raises additional equity and subordinated debt capital from institutional investors. These institutional investors, such as venture capital funds, insurance companies, and others, usually require very stiff terms including significant operational restrictions.

Investors will value two identical companies, one private and the other public, quite differently. Investors in the private company will discount the value of its equity securities by reason of their "illiquidity", that is, the inability to readily sell them for cash. A public company, however, has at least the illusion of liquidity which investors find comforting. Thus, companies that trade in the public market often trade for 1.5-times the value of same size companies in the same industry that are private.

The availability of a public capital alternative also permits the public company greater leverage in its negotiations with both institutional and individual investors. Many institutional and individual investors prefer investing in public companies since they have a built-in "exit," that is, they can sell their stock in the public market.

Personal Wealth

A public offering can enhance the personal net worth of a company's shareholders. Stories bound of the many millionaires and multi-millionaires created through public offerings. Even if a new public company's shareholders do not realize immediate profits by selling a portion of their existing stock during an initial offering, public-traded stock can be used as collateral to secure loans.

Competitive Position

Many businesses use their increased availability of capital as a public company to enhance their competitive position. Additional capital resources available to public companies permit greater market penetration. In addition, some businesses have only a short window of opportunity. For example, a technology based company can use proceeds from its increased availability of capital to achieve a dominant position in the marketplace well before its under-financed (and usually private) competitors. Customers like to deal with well financed businesses. A strong balance sheet is a good marketing tool. Often public companies have stronger balance sheets than other companies.

Prestige

A company's founders, co-founders and managers gain an enormous amount of personal prestige from being associated with a client that goes public. Such prestige can be very helpful in recruiting key employees and marketing products and services.

Availability of Stock as a Proxy for Currency

Stock of publically traded companies can be used as a proxy for currency in many situations, since it has an available market and easily obtainable valuation. Stock incentive plans can be used to attract and retain valuable employees. Form S-8 stock can be issued for consultants. Acquisitions can be made with the stock since publicly traded stock is viewed as currency for mergers and acquisitions.

Established Market Price for Future Offerings

The trading price of the public company's securities serves as a benchmark for the offer price of a subsequent public or private securities offering. In addition, once public, companies will find that they have greater access to the capital markets through the possibility of future stock offerings.

Special Government and Regulatory Status

The public corporation may be used for special purposes, such as qualifying as a category two company for overseas offerings pursuant to Regulation S. In addition, considerable tax advantages are available through reverse mergers, and proper exit strategies.

Ability to Take Advantage of Market Price Fluctuations

Once public, a company can take advantage of market price fluctuations to sell stock when the market is hot, and buy stock back when the markets are cold. This can often be an effective and low cost way to raise significant capital.

The Disadvantages of Going Public

Expense

The cost of going public is substantial, both initially and on an ongoing basis. As for the initial costs, the underwriters discount or commission can run as high as 10 percent or more of the total offering. Additionally you can incur significant out-of-pocket expenses. If your IPO is canceled at the last minute because of adverse market conditions or other reasons, you will be liable for substantial costs. On an ongoing basis, regulatory reporting requirements, stockholders meetings, investor relations, and other expenses of being public are significant. This is in addition to your management time, which can be considerable. In addition you may need to hire additional financial and accounting personnel to help prepare your company's financial disclosures. Likewise, you may need to hire a shareholder relations employee and to upgrade the quality of existing financial and accounting employees. These are all additional hidden costs of going public. A number of other smaller public companies have developed methods of minimizing their ongoing costs of being public. These methods include the judicious use of outside professionals, sending barebone annual and quarterly reports to shareholders, using inexpensive techniques to reproduce and mail these shareholder reports (e.g., third class mail), avoiding expensive shareholders' meetings, and so on. Minimization of such expenses can reduce your ongoing costs to just $20,000 per year.

Pressure to Maintain Growth Pattern

After going public there will be considerable pressure to maintain the growth rate you have established. If your sales or earnings deviate from an upward trend, investors may become apprehensive and sell their stock, driving down its price. You may not have the capital with which to buy back the stock at these depressed prices. As a result, you will have unhappy stockholders. Additionally, you will have to begin reporting operating results quarterly. People will evaluate the company on a quarterly, rather than annual basis. This will intensify the pressure and shorten your planning and operating horizons significantly. The pressure may tempt you to make short-term decisions that could have harmful, long-term impact on the company.

Disclosure of information

Your company's operations and financial situation are open to public scrutiny. Information concerning the company, officers, directors, and certain shareholders-information not ordinarily disclosed by privately-held companies will now be available to competitors, customers, employees, and others. You legally must disclose such information as your company's sales, profits, your competitive edge, material contracts with major customers, and the salaries and the prerequisites of the chief executive officer and certain highly paid executive officers. You must disclose it not only when you initially go public but also on a continuing basis thereafter. The SEC mandated disclosures should not be a major concern to most businesses. Your competitors may already possess a lot more information about you than you realize. Many companies already provide some financial information to business credit agencies, such as Dun & Bradstreet. Although public companies disclose much more financial information than private companies, the additional information is not necessarily a competitive disadvantage. In general, the SEC requires public companies to disclose information that is material to investors. You do not have to disclose information about specific customers for your products unless the customer's purchases are such a high percentage of your total sales as to be material to investors. Likewise, you do not have to normally disclose the exact profitability of specific products, provided that the product lines do not constitute a separate industry segment for financial reporting purposes. Accordingly, it is usually possible to avoid disclosure of the exact profitability of separate product lines.

Loss of Control

In a sufficiently large proportion of your shares is sold to the public, you may lose control of the company. Once your company is publicly held, the potential exists for further dilution of your control through subsequent public offerings and acquisitions. Likewise, you may be subject to a hostile tender offer. You can alleviate this disadvantage by the careful insertion a of anti-takeover provisions in your charter or by creating two classes of stock with disproportionate voting rights. Although there are few, if any, anti-takeover defenses that are completely, legally foolproof, some defenses can in practice be very effective against raiders. Defense that deprive the raiders of voting power or that otherwise penalize the raiders are particularly effective.

Shareholder Lawsuits

Public companies and their directors, officers, and control persons can be sued by their shareholders. Shareholder class action lawsuits typically follow a significant drop in the market price of your company's stock caused by adverse news about your company. The theory of these suits is that your company knew or should have known of the adverse news and had a duty to publicize it at an earlier date than the date the news actually became public. The lawsuit will allege that failure to publicize the information earlier constitutes "fraud-on-the-market." Overly optimistic or exaggerated statements contained in your company's reports to shareholders, or in press releases, are usually cited in these lawsuits to support their allegations. These statements are typically the result of a misguided attempt to generate interest in your company. Public companies can prevent such lawsuits, or at least win them if brought, only by a careful program of promptly disclosing adverse news to the trading markets and by avoiding overly optimistic or exaggerated comments in shareholder and press releases. This requires that you be sensitive to the need for such disclosures.

Estate Tax Disadvantage

One of the advantages of an IPO is to create sufficient liquidity to pay death taxes. However, there is a concomitant disadvantage. It is more difficult to obtain a low estate tax valuation for a publicly-traded stock than for the stock of a private company. This is true because the public market tends to value stocks on a multiple of earnings basis, rather than a book value basis.