The main reason a company would want to list on the stock market is to accumulate more capital to grow. They may have exhausted debt options and have chosen a capital raising. In this article we discuss the advantages and disadvantages of a company listing on the exchange.
Advantages of IPOs
- It can be good PR for the company as the IPO can create a lot of media interest and bring the company brand to the general public.
- The capital raised could be used to expand the company, pay off debt, or any other way the company may think it will benefit their organisation.
- It can be lucrative to owners as they stand to make a lot of money when the company lists on the stock exchange as the shares that they own can often trade at a premium compared to those of a private company.
Disadvantages of IPOs
- It is expensive for the company as the average cost for a company listing is $3.7 million for the IPO, on top of the 5-7% underwriter’s fees. There are also ongoing costs each year just to be a public company.
- The owner may lose control of the business once the company is listed. The founders of the company may need to make decisions that the shareholders agree with. If the shareholders are unhappy with where the company is headed, they could vote for change. In a private company the owners can make decisions about the company. This means that the company may not make any money immediately but it benefits them in the long term. With a listed company, the owners could be pressured into making short term decisions to appease shareholders.
- Listed companies are obligated to report publicly which is at the expense of the company. Unlisted companies can keep information such as revenue and director’s salary private.
- There is ongoing regulatory compliance which the company must adhere to.
Lauren Hua is a private client adviser at Fairmont Equities.
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