As a new business develops and grows, changes in the structure and direction of the business must be periodically made to match company’s goals. Even the company’s goals should be re-evaluated from time-to-time to prevent stagnation, and potentially missing opportunities. Many successful businesses start off as a simple part-time sole-proprietorship or partnership in someone’s garage, and eventually end up as an industry-leading multinational titan (i.e. Microsoft), or somewhere in between. What’s important is that as a business grows in scale, its organizational structure should change accordingly so that the company can continue to operate and expand with optimal efficiency in order to capitalize on market opportunities.
If a company is not founded as a corporation, when growth reaches a scale that is conducive to rapid expansion, transitioning to a corporate structure may be a prudent move by the owners. A corporate entity allows for a more flexible and favorable tax structure, especially when dealing with multiple tax jurisdictions. It also shields the owners (shareholders) from any personal legal liability that may be incurred by the corporation’s operations. But perhaps the most significant reason for incorporating is the options for raising capital that are made available. Capital intensive business activities such as research and development, rapid expansion, new product launches, or large acquisitions more often that not require companies to seek outside capital in order to fulfill their requirements. For a privately held corporation that finds itself in this type of circumstance, going public is a sensible and practical option.
When a company goes public under favorable conditions, a properly managed Initial Public Offering (IPO) could result in a huge capital windfall for the company, and a sharp increase in share-value for its shareholders. The company can now use the newfound capital to pursue is objectives, and the shareholders can enjoy their profits from the increasing share price. However, not all IPOs workout so well. While most IPOs do see an immediate sharp increase in the stock price, some result in an initial decrease. Even so, the company will still receive capital from the investment banks handling the IPO, and in most cases the stock price does eventually rise.
There are other benefits that a corporation may realize from going public. A company’s name and brand will be subject to greater exposure in the media prior to, and after the IPO takes place. As a public company, whenever the company’s stock makes any kind of significant price move, or there is a newsworthy event at the company, the financial media will more than likely publicize it. This will lead to greater exposure and publicity for the company, which is always good for selling its products provided that its “positive” publicity.
Another benefit for a corporation being publicly traded is the “prestige” and credibility that is garnered from being listed on a noteworthy securities market like the New York Stock Exchange, or the NASDAQ. Even more notable is a corporation that is included as part of a Major Stock Index such as the DOW 30, the NASDAQ Composite, or the S&P 500. These “corporate accolades” are reserved for the most well-established corporations, and although they do not happen immediately upon going public, they are pursued by almost all corporations. Another benefit includes attracting top talent to work for the corporation at all levels. However, the most important benefit associated with the publicly traded corporation’s reputation is the effect on the consumers of its products or services. A consumer that recognizes a brand name from seeing it on a televised financial news story, the cover of a financial publication, or from a personal IRA statement that her or she recently reviewed, will be more inclined to purchase the products of a well established public company than otherwise.