Advantages of Public Company
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Access to Capital
A public offering of stock can vary from $500,000 to over $1 billion. In 1999, 544 companies completed an IPO(Initial Public Offering). The total capital raised from these offerings was $23.6 billion. By offering stock for sale to the public a company can access a substantial source of corporate funding.
If a company needs to raise capital, it can sell stock(equity) or it can it issue bonds(debt securities). An initial equity offering can bring immediate proceeds to a company. These funds may be used for a variety of purposes including; growth and expansion, retiring existing debt, corporate marketing and development, acquisition capital and corporate diversity.
Once public, a companys financing alternatives are increased. A publicly traded company can return to the public markets for additional capital via a bond or convertible bond issue or secondary equity offering. A public status can also provide favorable terms for alternative financing from public and private investors.
In general, public companies have a higher valuation than private enterprises.
Liquidity
To sell the stock of a private company, a stockholder must find another individual that is interested in owning the shares. This is very difficult, especially for minority positions.
By going public, a company creates a market for its stock in which buyers and sellers participate. In general, stock in a public company is much more liquid than stock in a private enterprise. Liquidity is created for the investors, institutions, founders, owners and venture capital professionals. Investors of the company may be able to buy or sell the stock more readily upon completion of the public offering.
This liquidity can elevate the value of the corporation. The stocks liquidity is contingent on a variety of factors including, registration rights, lock-up restrictions and holding periods. A public company has greater opportunity to sell shares of stock to investors. Ownership of stock in a public company may help the companys principles to eliminate personal guarantees.
Liquidity can also provide an investor or company owner an exit strategy, portfolio diversity, and flexibility of asset allocation.
Compensation
Many companies use stock and stock option plans to attract and retain talented employees. It is increasingly common to recruit and compensate executives with a combination of salary and stock. Stock in a public company can be issued as a performance based reward or incentive.
This reward is more desirable if the stock has a public market. Stock can be instrumental in attracting and keeping key personnel. Also, certain tax advantages are a consideration when issuing stock to an employee. Generally, capital gains taxes are lower than ordinary income taxes. Owners and employees may have specific restrictions relating to the liquidity and sale of the stock.
A public offering can create a market for the companys stock. This market can result in liquidity and reward for the companys employees. A stock plan for employees demonstrates corporate good will allows employees to become partial owners in the company where they work.
An allocation of ownership or division of equity can lead to increased productivity, morale and loyalty. This type of compensation is a way of connecting an employees financial future to the companys success.
Prestige
A public offering of stock can help a company gain prestige by creating a perception of stability. A companys founders, co-founders and managers gain an enormous amount of personal prestige from being associated with a client that goes public. Prestige can be very helpful in recruiting key employees and marketing products and services.
When sharing ownership with the public, you spread the companys reputation and increase its business opportunities. By selling stock on an exchange your company can gain additional exposure and become better known. This exposure may lead to improved recognition and business operations.
The public status can be leveraged when marketing goods and services. Often a companys suppliers and consumers become shareholders, which may encourage continued or increased business. In this example, a public company could have a competitive advantage over a private enterprise. An IPO can indicate credibility to a companys customers, which may lead to increased sales and a greater corporate profile.
Once public, lenders and suppliers may perceive the company as a safer credit risk, enhancing the opportunities for favorable financing terms. Also, a public offering can create publicity that is effective when marketing your company.
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Public firms tend to have higher profiles than private firms. This is important in industries where success requires customers and suppliers to make long-term commitments.
For example, software requires a significant investment in training and no manager wants to buy software from a firm that may not be around for future upgrades, improvements, bug fixes, etc. Indeed, the suppliers and customers perception of company success is often a self-fulfilling prophecy.
Publicity
A public offering of stock can generate prestige, publicity and visibility, which is effective when marketing your company. Public companies are more likely to receive the attention of major newspapers, magazines and periodicals than a private