5 Advantages of an Initial Public Offering

When deciding whether it’s the right time for an IPO, businesses often debate the pros and cons. Going public is popular because the advantages of an initial public offering often outweigh any challenges or downsides. These benefits include capital, visibility, investor opportunities, a new kind of business currency, and the enhancement of the company’s governing structure.

A business that understands these advantages can plan to maximize them before, during, and after their IPO as they become a publicly traded company with new governance, operations, and opportunities.

1. Access to Capital

When a company sells shares to public investors, they receive capital in return for each share. In this way, an IPO is an excellent fundraiser, allowing businesses to sell pieces of the company that can then be reinvested in growth and profitable endeavors, which benefits the new shareholders and the company itself.

A company decides on the price and quantity of shares in order to generate capital through their sale. The total amount of shares sold at the set price determines the total capital that is accumulated as a result of the IPO. Then, trading shares on the public market and releasing new shares can continue to provide a source of capital.

Funds from an IPO are almost always put toward growth and expansion. They can be used to establish new locations, grow departments, invest in research and development of new products, or hire new people. Sometimes a business will expand into new markets or simply grow their current operations to handle a larger market share of their current markets. All these uses of IPO capital increase the company’s profitability, which aligns with shareholder goals.

2. Increase Visibility and Prestige

An IPO is a prestigious public event for any company. Going public makes the news, is talked about in investor circles, and reflects on the success of the company. An IPO is a great opportunity to boost the visibility of a brand and increase their credibility as a prestigious company that is worth investing in.

Once a company has shares available on the public market, they also gain access to a new channel for marketing and reputation-building. If their shares are desirable and sell at rising prices, their company reputation will rise as the stocks are recommended and published in investment reports. 

3. Liquidity for Existing Shareholders

Before a company goes public, they may have a number of private investors or shareholders who made the magic happen during a company’s startup launch. From friends and family who own private stocks to venture capitalists and angel investors, these investors will have a chance to see their investments realized as liquid profits when the company goes public. While early shareholders can hold onto their shares, they can also choose to sell their shares on the public market at a significant profit.

4. Currency for Acquisition

Once a company has publicly traded shares on the stock market, those shares become a unique type of currency only available to public companies. If a company wants to acquire another company, they can buy in stocks without reducing their current financial capital. 

The same currency can be used in negotiations with business partners, offering shares to receive more favorable deals and exchanges, or to reward or incentivize employees.

5. Enhanced Corporate Governance and Transparency

A company that goes public must meet specific and rigorous governance standards. A part of this is the formation or reorganization of a board of directors. The board must operate under the strict rules of an operating agreement while prioritizing the company’s growth, profitability, and core values.

Committee meetings and corporate minutes provide extreme transparency, ensuring the board and the business are managed properly from the top down.