With no doubt, most if not all businesses exist with an objective of expansion. Thus businesses need financing to expand, in combination with other resources. Finance may be regarded as the fundamental business resource, since it provides access to all other more specific resources, to extent that they are available.
The company’s financial position will be a major part of the strategic position and will also constitute a strong influence on the process of strategic choice. Finance is thus of inherent strategic significance and several aspects of financial management are properly the concern of the managers at the strategic apex. We should appreciate that even family owned businesses can expand through proper financial strategies.
Let us come out of our traditional way doing business. Try now and the benefits probably outweigh costs.
Initial public offering (IPO)
Let us understand first, the IPO or A primary offering. This is the first sale of stock by a private company to the public. IPOs are often issued by smaller, younger companies seeking the capital to expand, but can also be done by large privately owned companies looking to become publicly traded, to enjoy its benefits.
In IPO, the issuer obtains the assistance of an underwriting firm, which helps it determine what type of security to issue (common or preferred), the best offering price and the time to bring it to market. Underwriting is the process of raising money by either debt or equity. You can think of underwriters as middlemen between companies and the investing public.
Primary offerings can be followed by secondary offerings, which serve as a way for a company that is already publicly traded to raise further equity capital for its business. After the offering and the receipt of the funds, the securities are traded on the secondary market, where the company does not receive any money from the purchase and sale of the securities they previously issued. It usually isn’t possible to buy shares in a private company. You can approach the owners about investing, but they’re not obligated to sell you anything. Public companies, on the other hand, have sold at least a portion of themselves to the public and trade on a stock exchange this is why doing an IPO is also referred to as "going public. Remember, an IPO is just selling stock. It’s all about the sales job. If you can convince people to buy stock in your company, you can raise a lot of money. Public companies have thousands of shareholders and are subject to strict rules and regulations. They must have a board of directors and they must report financial information every given time.
From an investor’s standpoint, the most exciting thing about a public company is that the stock is traded in the open market, like any other commodity. If you have the cash, you can invest. The chief executive officer (CEO) could hate your guts, but there’s nothing he or she could do to stop you from buying stock.
Why go public?
As mentioned earlier, going public raises cash, and usually a lot of it, access to long term capital and being publicly traded also opens many financial doors. Your access to capital will hence increase, since you can attract potential investors.
Since public companies are highly regulated, there is improved corporate governance due to the higher disclosure and continuing listing requirements demanded by the stock exchanges, thus increase investor confidence.
As long as there is market demand, a public company can always issue more stock. Thus, mergers and acquisitions are easier to do because stock can be issued as part of the deal. This enables your company expand beyond family capacity, and enjoy various synergies.
Trading in the open markets means liquidity. This makes it possible to implement things like employee stock ownership plans which help to attract top talent. Thus ability to expand and grow management capacity as part of capital would be used to hire and afford quality management thus the image of your company may be improved.
Being on a major stock exchange carries a considerable amount of prestige. Succession, when the family king or the business head dies, the business is guaranteed of continuity.
While the benefits are attractive, be sure you are ready to assume some obligations:
You must continue to keep shareholders informed about the company’s business operations, financial condition, and management, incurring additional costs and new legal obligations.
You may lose some flexibility in managing your company’s affairs, particularly when shareholders must approve your actions. Your public offering will take time and money to accomplish.
The ability to raise capital to finance growth projects is a major challenge to new and growing small businesses which are typically private companies. Their efforts to raise capital on favorable terms are constrained by the lack of liquidity of private shares and by the absence of generally available information on their future prospects. Banks and other lenders seek higher premiums for the lack of liquidity for non-traded shares and often impose highly restrictive covenants on private companies to account for the information asymmetry and the resulting moral hazard and agency problems.
However, by going public, a firm incurs direct costs in the form of underwriter and administrative fees and indirect costs in the form of under-pricing.
Private firms planning to become public corporations have to identify both the timing and the appropriate mechanism to make this transition.
If you have a successful small business, sooner or later you’ll consider selling it off along with all its worries and responsibilities. You’ll fantasize about living the rest of your life in an exotic tropical paradise. Remember, though, that the degree of care and effort you put into the sales process.