IPO vs. Staying Private: What’s the Difference?

Initial Public Offering (IPO) vs. Staying Private: An Overview

An initial public offering (IPO) is the process a private corporation goes through so it can sell shares to investors on a stock exchange. This puts ownership of the company in the hands of the public. If a company chooses to remain private, ownership remains in the hands of private owners, though it can also issue stock to shareholders. Companies go through the IPO process or stay private for many different reasons, whether it’s to raise capital or to keep expenses down while saving time.

Key Takeaways

• An initial public offering means a company can sell its shares on the public market.
• Staying private keeps ownership in the hands of private owners.
• IPOs give companies access to capital while staying private gives companies the freedom to operate without having to answer to external shareholders. 
• Going public can be more expensive and rigorous, but staying private limits the amount of liquidity in a company.

IPO

As mentioned above, an initial public offering is a process a private company needs to go through in order to sell its shares to the public, usually on a stock exchange. Private companies normally have to go through a period of growth before they decide to go public through an IPO.

One of the main reasons why a private corporation goes public is financial. This gives the company access to cash—usually in large amounts. This influx of capital can be used to pay off debt and increase research and development (R&D), or other ventures. It also allows companies to shore up their balance sheets and secure financing in the future.

There is also a perceived legitimacy in being a public company because it tends to make potential investors and business partners feel more at ease working with the company since information is filed with the Securities and Exchange Commission (SEC) and available for all to see.

Cons

While prestige and cash are tempting reasons, there is a huge risk associated with undertaking an initial public offering. What if the IPO fails? Or there’s not enough interest from the public? Then there’s the fact that it’s an expensive and time-consuming process. The requirements for holding an IPO and being publicly traded are significant drawbacks.

“Going public, even under the reduced reporting requirements of the JOBS Act, can be an expensive exercise,” says Helen Adams, a former managing partner of Haskell & White, one of the largest independently owned accounting, auditing, and tax consulting firms in Southern California. “There are specific SEC financial statement filing requirements on a quarterly and annual basis, and many periodic legal reporting requirements, including those for material transactions and for stock trading by senior executives and board members.”

Companies end up spending more money as a public company than a private one. Larger companies can afford to pay these costs but small ones may find it affects their bottom lines without careful consideration.

Important

While both can issue stock to shareholders, public companies sell them on a public exchange, while shares in private companies remain in the hands of private shareholders.

Staying Private

Going public may help private business owners grow their balance sheets, smooth business transactions, make it easier to take over competitors, and make them stand up a little straighter, but there are many pros to remaining private. Private companies report to a finite group of investors. While the pool of potential investors is smaller since they have to be accredited, the amount of capital that’s usually poured into early-stage companies is incredible.

Staying private gives a company more freedom to choose its investors and to retain its focus or strategy, rather than having to meet Wall Street’s expectations. And since there’s a risk involved in going public, the benefit of staying private is saving the company from that risk.

Cons

With a private company, you may not be able to attract top talent through benefits like stock incentives, according to Mike Ser, an active trader, trading coach, and entrepreneur with more than 16 years of trading experience. He is the founder of Active Traders Academy. Another con, he says, is that as a private company, you can’t use your stock as currency to acquire your competitors or other companies. “If you’re a private company, it’s more of a challenge as you either have to have cash or borrow debt to acquire companies.”

Staying private also limits liquidity for existing investors. They can’t easily sell their stake in the company by going to a public exchange. It may not be so hard to find a buyer for a well-known, top-performing, venture capital-backed company, but in the case of a lesser-known company, the only potential buyers might be other existing owners. Selling shares in the secondary market is often challenging, especially since prospective buyers have to be accredited. 

Investors may hold a significant stake in a company and be vocal about how they think a business should be run. Relying on private investors may not allow the company to raise the funding it needs, and it may not be able to find enough private investors interested in the business.

Key Differences

The main difference between going public through an initial public offering (IPO) and staying private lies in ownership structure and operational transparency. An IPO transforms a privately held company into a publicly traded one, allowing it to sell shares to the general public on the stock exchanges.

Public ownership comes with many benefits, such as access to large amounts of capital, which can be used to expand operations, pay down debt, or fuel innovation. However, it also imposes stringent regulations, reporting obligations, and shareholder accountability.

Public companies are required to disclose their financial health and strategic decisions, which can bring on external scrutiny and pressure to meet performance expectations.

Private companies, on the other hand, maintain ownership within a limited group of stakeholders, allowing for more control and flexibility in decision-making. Without the need to comply with extensive regulatory requirements or report to a wide base of external shareholders, private firms can focus on long-term strategies without the constant push to deliver immediate results.

The trade-off, however, is a restricted ability to raise funds and limited liquidity for investors. While private ownership offers freedom from financial market fluctuations and outside pressure, it can limit growth opportunities.

Can Private Companies Still Raise Money Without Going Public?

Yes, private companies can raise funds through various means such as venture capital, private equity, or debt financing. These sources often involve accredited investors or institutional funds that provide significant capital without the company needing to go public. While this limits the pool of potential investors compared to an IPO, it allows the company to maintain control and avoid the regulatory burdens associated with public markets.

Are There Alternatives to an IPO for Going Public?

Yes, there are alternatives such as direct listings and special purpose acquisition companies (SPACs). A direct listing allows a company to go public without issuing new shares or raising new capital, which avoids the dilution of existing shares and underwriter fees. SPACs, on the other hand, are publicly traded shell companies that merge with private companies to take them public, providing a potentially quicker route to public trading without the regulatory hassles.

How Does an IPO Impact a Company’s Management and Operations?

An IPO can lead to many changes in a company’s management and operations. Once a company goes public, it is accountable to a larger group of shareholders and must adhere to corporate governance practices that prioritize transparency and shareholder value. This can shift management’s focus from long-term goals to hitting short-term performance metrics, sometimes influencing decision-making processes to align more closely with market expectations.

The Bottom Line

Choosing between going public or staying private involves weighing the benefits and challenges unique to each path. An IPO offers companies access to significant capital, added prestige, and public market liquidity, but comes with substantial costs, regulatory demands, and shareholder pressure.

Staying private allows for greater operational freedom and long-term strategic focus but limits funding sources and investor liquidity. Ultimately, the decision depends on the company’s growth ambitions, financial health, and tolerance for external scrutiny.