Introduction to Corporate Finance

12: Raising Long-Term Financing

tied up in their companies. Going public allows entrepreneurs to reallocate cash from their businesses

and to diversify their portfolios. Entrepreneurial families also frequently execute IPOs during times

of transition – for example, when the company founder wishes to retire and provide a method of

allocating family assets among those heirs who do and do not wish to remain active in the business.

5 Increased public and investor profile. Listed companies tend to receive greater media attention,

increasing awareness of its products and services. In addition, coverage by investment research

analysts can help sustain demand for shares and enhance the company’s reputation within an

industry  – ultimately increasing demand for its products and improving its ability to attract more

business.

6 Institutional investment. The increased transparency that occurs as a result of listing (through the

disclosure and public information requirements) and liquidity introduced due to their ability to trade

the company’s shares on the stock market can be attractive to institutional investors. This has the

potential to improve credibility, business networks and access to new funding sources.

7 Market valuation. As listed entities, company shares are continuously priced by the market. Thus,

being listed generates an independent market valuation.

8 Enhanced operating efficiency. According to the ASX, ‘the requirement for more rigorous disclosure

tends to lend itself to better systems and controls, improved management information and greater

operating efficiency of the business as a whole’.^6

9 Reassurance of customers and suppliers. Companies that are listed may find that the perception of their

financial and business strength is improved. This is facilitated by the rigorous due diligence process

that they go through in order to qualify for listing, as well as the stringent continuous disclosure

requirements that they face on an ongoing basis.

In addition to these benefits, being a public company also increases a firm’s overall prestige. However,

the often massive costs must be weighed against the obvious benefits of an IPO.

Drawbacks to Going Public

1 Potential loss of control. One of the inevitable aspects of selling shares is ceding a degree of control

to external shareholders. This can make it harder to pursue some corporate transactions (like related

party transactions). It can also make the company vulnerable to attacks as a takeover target.

2 Susceptibility to market conditions and media exposure. Once companies are listed, they open

themselves up to an extra set of risks – those that affect the stock market. Thus even if the business

is run extremely well, the company can be affected by market rumour and other market factors that

would not have had an impact on the business before listing. Similarly, heightened media exposure,

because of its listed status, could be unwelcome, if the company faces any negative situations.

3 The financial costs of an IPO. Few entrepreneurs are truly prepared for just how costly the process

of going public can be in terms of out-of-pocket cash expenses and opportunity costs. Companies

will incur various costs including underwriting, prospectus preparation, legal and advisor fees

and printing costs. In the US, total cash expenses of an IPO, such as printing, accounting and

legal services, frequently approach $1 million, and most of this must be paid even if the offering

is postponed or cancelled. Additionally, the combined costs associated with the underwriter’s fees

6 ASX IPO brochure, IPO: The Road to Growth. 2011.