Most business owners dream of taking their company public. A publicly traded company is widely seen as the epitome of business success – it signals a level of accomplishment that few are able to achieve.  While this is great, says Scott Stevens, a partner at Grays Peak Capital LP, there are some serious downsides to going public as well.

According to Stevens, anyone considering taking their company public must assess the pros and cons of the decision and how it will impact their company in the long term. On the flip side, there are also pros and cons of keeping a growing company private.

Before jumping into the advantages and disadvantages of going public, what does ‘going public’ mean in the first place? Simply defined, going public is the process by which a private company becomes a public company - the company goes from being privately held to a company whose shares are listed on a public stock exchange, and anyone can buy and sell its shares. With this definition in mind, here are Grays Peak Capital LP and Scott Stevens’ top advantages and disadvantages of a company going public:

Advantages of Going Public

Finances

The biggest advantage of taking a company public according to Scott Stevens is the financial implications that going public brings with it. When a company goes public, it sells its shares to the public, unlocking a major cash inflow (cash that requires no repayment). With this money, the company can invest in growth, processes, technology and other activities that will help the company dominate its market and increase their market share.

Legitimacy

When a company goes public, Grays Peak Capital LP, everyone assumes it has undergone rigorous examination by the SEC (News - Alert), FNRA, or other parties, who have determined it fit to be listed. This legitimacy makes it easier to win contracts, work with bigger corporations, and helps to get favorable credit terms from lenders. With this legitimacy also comes public confidence, which can help to maintain the share price, making the company even more valuable.

Cash-Out

For founders and early investors, a company going public means they can unlock the value their stake is worth in the company. Factoring in any lock-in periods, they can get a major windfall once they get the green light to offload their shares on the open market.

Mergers and Acquisitions

You have probably heard the term ‘in cash and stock’ when M&As are discussed. This means a public company can purchase another company by giving the target company owners stock and cash instead of just cash, as is the case with private companies.

Disadvantages of Going Public

Expense

The Initial Public Offering (IPO) is an expensive process. When you consider the publicity, paperwork, and time costs of going public, the decision to go public can be a costly one. For large companies with tens of millions in revenue, this may not be an issue, but for a smaller company, this could put the company in a tight financial spot.

Uncertainty

Not all companies that get listed go on to enjoy stock price rises. In some cases, Grays Peak Capital LP states a company is listed only for the share price to fall precipitously. The resulting ‘penny stock’ can make a previously valuable private company a near-worthless company based in its stock price.

Lock-In Periods

Going public does not usually signal instant riches for the founders or principal shareholders. Lock-in periods can be challenging, especially as the company’s new status will come with new pressures which may negatively impact the share price by the time the lock-in period lapses.

Loss of Control

Public companies tend to be governed differently from private companies. While previously the owners and senior management called the shots, now, Scott Stevens explains Wall Street and shareholders call the shots. This loss of control can force the company to change course from what the founders’ intended.

Continued Scrutiny

Once a company goes public, it becomes subject to a perpetual cycle of public scrutiny and filing reports. Also, the company must continually comply with a long list of regulatory requirements to maintain compliance. These add to the cost and complexity of running the company.

Public or Private?

According to Scott Stevens, the decision to go public must be informed by the core fundamentals of a company, which include its size, market position, growth rate, etc. If these fundamentals add up to an IPO, then go for it. On the other hand, going for an IPO for the prestige, or as a means to unlock shareholder value may not be a good idea.