Step 4 of
Disadvantages of an IPO
IPOs can be great ways of raising money, but they aren’t right for every company. Some firms, like IKEA and Mars, manage to do just fine without ever going public. Others, like Virgin and Dell, find after their IPO that being a public company isn’t right for them, and take themselves private again later on.
Here are four reasons not to do an IPO:
- It’s expensive. Advisory firm PwC says the average firm incurs $3.7 million in costs for the IPO, on top of the 5-7% underwriters’ fees. Then it costs $1.5 million a year just to be a public company and manage all the legal and regulatory requirements.
- You lose control. When you’re running a private company, you can do more or less what you want, as long as it’s legal. When you go public, you have to answer to shareholders and a board of directors. You have to keep generating bigger and bigger profits each quarter to satisfy them, and you have to justify all your strategic decisions to skeptical analysts. Your shareholders have voting power, too, so they can go against your judgments.
- Your stock gets diluted. In an IPO, you’re selling off part of your company. The influx of money is nice, but the cost is that your own share of the company, and of future profits, is smaller.
- The P stands for public! Most of us like keeping things private. Imagine if you had to post your bank statements, credit card balances, and Venmo transactions on the Internet for everyone to look at. That’s what life is like for public companies. Everything is available for scrutiny, and sometimes that can involve giving information away to your competitors.