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There are many benefits to being a
public company.
Some
of the most compelling advantages
can include:
1. Access to capital
When you go public and become a public company it can give
investors more confidence in
investing in your company. When your
stock has a public price, it gives
you a benchmark price to raise
capital. Any potential investor can
go on the Internet or call a broker
and get a quote of your company’s
stock price. Some public companies
then give investors who buy stock
directly from the company in a
private placement a discount from
the public trading price (if they
are willing to hold the stock for
one year). This gives this investor
even more of an incentive to invest.
Capital raised can be used for a variety of purposes including;
growth and expansion, retiring
existing debt, corporate marketing
and development, and acquisition
capital. A company's financing
alternatives are greatly increased.
A publicly traded company can go to
the public markets for capital with
a stock or bond issue, and may also
convert debt to equity.
2. Liquidity
By going public, a company can create a market for its stock.
This gives the public company a
greater opportunity to sell shares
to investors. In general, stock in a
public company is much more liquid
than stock in a private enterprise.
Liquidity is created for the
investors, institutions, founders,
and owners. Investors in the company
may be able to buy or sell the stock
more readily. Often time's
institutional investors and venture
capitalist will require a company to
become public before committing
funds. It is generally better to
raise capital as a public company
because investors know they have an
exit strategy.
A public company may help the company to borrow more easily and
eliminate personal guarantees.
Liquidity can also provide an
investor or company owner an exit
strategy. Liquidity is one of the
many reasons why public companies
are typically valued so much more
than a private business.
3. Mergers and Acquisitions
Once a company is public and the market for its stock is
established, the stock can be
considered as valuable as cash when
acquiring other businesses & assets.
This depends on the specific
company.
A public company usually increases a company's valuation leading
to a variety of opportunities
including mergers and acquisitions.
A public company also has the
advantage of using the market's
valuation when exchanging stock in
an acquisition.
Securities and Exchange Commission disclosure requirements offer
the public more confidence because
in annual reports a company lays out
its financial condition.
4. Increased Valuation
The market value of a public company is normally substantially
higher than a private company with
the same structure in the exact same
industry. Converting a private
company to a public company results
in a substantial increase in value
to owners. Statistics published by
the U.S. Chamber of Commerce
demonstrates that sellers of private
companies receive an average of 4 to
6 times their net earnings. Whereas,
public companies sell at an average
of 20-25 times their net earnings.
High tech companies are valued even
higher.
Investors in a private company will discount the value of its
stock because of their
"non-liquidity" - the lack of a
ready, public market for them.
Therefore, public companies often
are valued so much greater than
private, similar companies in the
same or similar industry. The
availability of other alternatives
to raising capital permits a public
company greater leverage in its
negotiations with investors. Most
institutional and individual
investors prefer investing in a
public company since they have an
"exit," that is, they can sell their
stock in the public market. Many
companies that were private and
about to be purchased went public to
be purchased at a much higher price.
5. Compensation
Many companies use stock and options as an incentive to attract
and retain important employees. This
reward is more desirable when the
company is publicly traded. Stock
can be key in attracting and keeping
key personnel. Also, certain tax
advantages are a consideration when
issuing stock to an employee. Being
public can help to create a market
for the company's stock. This market
can result in liquidity and reward
for the employees.
Stock compensation is a way of connecting an employee’s financial
future to the company's success.
6. Prestige of being a Public Company
A public offering, stock offering, and equity offering of stock
can help a company gain prestige by
creating a perception of stability &
power. The status of being a public
company can have a dramatic effect
on a company's profile. They will be
seen as more competitive and stable.
This perception can lead to expanded
business opportunities and
confidence from consumers and
investors.
A company's founders will gain prestige from being associated
with a public company. Prestige can
be helpful in attracting employees
and marketing services or products
and raising capital. As a public
company you enhance the company's
reputation and increase its business
opportunities. Your company gains
additional exposure and become much
better known. Being a public company
is publicity itself.
Sometimes suppliers and consumers want to be shareholders as well
as strategic partners, which may
encourage continued or increased
business. Once public, lenders and
suppliers may perceive the company
as a safer credit risk; this
enhances the opportunities for good
financing terms. Indeed, the
suppliers' and customers' perception
of company success is often a
self-fulfilling prophecy. Many
people have called it the ultimate
status symbol.
7. Personal Wealth
One of the chief benefits of a public offering is that the
company's stock may eventually
becomes liquid, offering financial
independence for the founders. This
can be of major financial
significance.
A public market for stock offers an exit strategy and liquidity
for investors. A public company can
enhance the personal net worth of
the shareholders. Even if a public
company's shareholders do not
realize immediate profits,
publicly-traded stock can be used as
collateral or as a currency to
acquire assets. It makes sense at an
appropriate time for investors and
entrepreneurs to cash out some of
their equity in order to diversify
their holdings or to enjoy life.
Employees and officers have two ways
to add to their wealth: by receiving
a salary and selling stock or
trading the stock for another type
of asset.
8. Estate Planning
The public company can be used as part of estate planning for
management. This allows a business
owner to pass assets to heirs.
Management may want to transfer the
accumulated value in a business to
family members.
9. Publicity
Public companies are more likely to receive the attention of
newspapers, magazines and
periodicals than a private business.
The proper use of press releases,
interviews and news stories can
increase investor awareness,
shareholder value demand for public
company stock. A strong public
relation campaign coupled with media
and the stock price can potentially
increase sales and revenue and
investors.
The publicity received from being a public company can encourage
investments from the public,
business development and strategic
relationships. Analyst reports and
daily stock market quotes contribute
to more awareness by consumers and
the financial community. By virtue
of being a public company your
company's story can more easily get
out to the world. This allows for
investors who would not invest in
private companies but will invest in
public companies to find out about
your company.
The publicity that a public company
may receive can attract the
attention of potential partners,
investors and new business or merger
candidates. Most private firms do
not appear on the radar screen of
investors. Being a public company
makes it easier for other companies
to notice and evaluate your business
for potential synergies and to raise
capital. |
