Going public gives a previously private company a chance for growth or money to begin research. However, there are some significant disadvantages a business should consider before opting for an IPO. These are some of the main reasons companies choose to avoid IPOs.
SEC Rules and Regulations
Privately owned companies can register under Regulation D and avoid many rules and regulations put forth by the Securities and Exchange Commission. One of the major rules requires companies to produce quarterly and annual earnings reports for investors. By going public, financial statements are needed to show shareholders the potential of the enterprise. There are also many periodic legal reporting requirements, such as material transactions and stock trading by any senior executives or board members. This process can seem daunting and time-consuming.
Time Consuming
The paperwork can take quite a while to file, but that isn’t the only time-consuming aspect of an initial public offer. It takes quite a few months to comply with the SEC and begin trading, and each business experiences a different timeline. An IPO is a very detailed process that starts with filing the S-1 form and includes many reviews and company responses to the SEC. Some business owners state that this process can take 10 weeks while others state it can take six months. Market conditions, company performance, and valuation expectations can all affect the time period of a corporation moving from private to public.
Expensive
The expenses of going public are both variable and fixed, making it difficult to give an actual quote for the cost. The largest cost comes from the underwriting discount or gross spread, which is set at around 5%-7% of total proceeds. This means that if your business makes $200 million in profit, $14 million will go toward the underwriting discount.
Other additional costs add up and include listing fees, printing fees, legal fees, and any other expenses for drafting the registration letter, comfort letter, and compliance with the SEC. Thankfully, these are usually fixed—although they do vary based on your area. PricewaterhouseCoopers (PwC) suggests that companies pay on average $3.7 million in expenses for going public.
Delayed Payback
After the initial payout to become public, companies often scramble to recoup any money lost and continue cash flow. However, the money isn’t accessible immediately after shares are sold. Once shares are sold, the funds go to "lock-up" for a period of time. An IPO lock-up is a contractual caveat of 90 to 180 days where the majority stockholders are forbidden to sell any shares, according to Investopedia. Most IPO calendars announce the amount of time the shares will be in lock-up, allowing businesses to prepare for the possible loss.
Shareholder Ownership
The biggest drawback of going public is that the shareholders have a stake in the company. The business must do what’s best for the investors, which may or may not be in the best interest of the company owner. If shareholders have a larger percentage of the company than the owner or management, it’s possible that decisions can be overridden by those who own the majority of the business through stock.
