It’s no secret companies need funding in order to thrive. However, as a company grows, it’s funding needs change over time. Some eventually reach a point where their founders consider taking the company public (also commonly referred to as stock market flotation in the UK). By selling shares, organisations can raise more money, helping them continue working towards their goals.
Determining whether this type of funding for a small business is the right move requires assessing a variety of factors. In the meantime, the following information will simply help you better understand the basic advantages and disadvantages of stock market flotation.
Advantages
The primary advantage of stock market flotation is access to more capital. Again, as a business grows, its current funding sources may not be enough to sustain continued growth. This is typically one of the main reasons business owners consider going public.
That said, it’s by no means the only benefit of doing so. Selling shares of the company on the stock market also allows businesses to grant shares to various employees. This can help motivate them. Quite simply, when an employee owns shares of the company, they’ll be more inclined to help it succeed. The better the company performs, the more valuable their shares will be.
It’s also worth noting that stock market flotation is considered to be an effective way to attract more attention from both the press and the public. Although all companies can theoretically benefit from an enhanced profile, this is particularly important to small, lesser-known ventures. Having a bigger public profile is often key to accessing business opportunities that would have otherwise been unavailable.
Of course, stock market flotation isn’t without its potential disadvantages. You need to be cautious when deciding if this move is right for your company. The points below explain why.
Disadvantages
When you sell shares of a company to the public, you suddenly need to consider the interests of shareholders every single time you make a major business decision. Unfortunately, their interests and goals may not correspond with yours.
Perhaps you want to devote a substantial portion of your resources to a project that won’t likely deliver major revenue for some time. In the long run, it may be the right idea for the company, but if it results in short-term quarterly losses, your shareholders might not be happy. This is something you wouldn’t need to consider if you didn’t have any. Additionally, now that you have investors, you need to prioritise investor relations. This means making sure someone on your team is responsible for providing them with essential updates.
You also need to research any fees associated with stock market flotation. Numerous professional costs are often more expensive when you sell company shares.
On top of that, it’s important to remember that the value of a company’s stock isn’t determined solely by its performance. Various factors can impact stock market conditions unfavourably. Everything from public sentiment to poor economic conditions may now affect your company.
These are all important points to keep in mind as you consider stock market flotation. Again, knowing if this is the right move requires assessing a range of factors. The basic information here will simply help you begin the decision-making process.
Rae Steinbach is a graduate of Tufts University with a combined International Relations and Chinese degree. After spending time living and working abroad in China, she returned to NYC to pursue her career and continue curating quality content. Rae is passionate about travel, food, and writing.
This article does not constitute legal advice.
The opinions expressed in the column above represent the author’s own.
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