Evaluating the Advantages and Disadvantages of an IPO

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IPOs
Image: investopedia.com

Raymond Nobu Chang is an entrepreneur and business executive with years of experience in online sales, cross-border transactions, and venture capital financing. With an MBA from the Yale University School of Management, Raymond Nobu Chang has led many companies to successful initial public offerings (IPOs).

An IPO is the first sale of a company’s stock to the public. Before deciding whether to go public, a company must evaluate the potential advantages and disadvantages of doing so.

One of the advantages of going public is the injection of capital. Raising more capital allows the company to expand sales, increase research, make capital expenditures, and grow the company, capturing more market share. In addition, so long as there is a demand from the market, public companies can issue more stock.

Another advantage of going public is increased awareness. IPOs are subject to a lot of public scrutiny, which brings the company’s products and services greater attention and can help augment its marketing programs and revenue. Venture capitalists, who want to make money from a company they have built, also use IPOs as an exit strategy.

On the other hand, one of the disadvantages of going public is disclosure. Public companies are required to disclose operations through periodic financial reports in line with the Securities Exchange Act of 1934. These reports should be accompanied by audit reports, meaning increased overhead costs. Going public will also expose companies to public shareholder demands, which may lead the offering company to give priority to short-term profits over long-term growth.

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