I hear a lot of acronyms around the office. Most sound like teenage texting shorthand. AUM, REIT, CFA, CFP, and IPO. It's that one, IPO, that I've been curious about. Initial Public Offering. I get that and I assume you do too.
But I was always asking myself, "Self, why do companies even go public?" Seems like kind of a pain to go from total control to being run by a board and letting randos vote on the direction of your business. Or the pressure of being responsible to produce results for a gaggle of people relying on you to make them stacks (that's millennial for thousands of dollars).
So, as always in this series, I bring to you a burning question of mine that I'm too lazy to google. Let's get to it.
Do companies go public when they need money or when they have money?
Eddie Goepp, COO of Wela
Typically, a private company goes public when they’re looking to raise money in order to grow their business. Sometimes, however, large established companies that are privately owned will go public in order to provide liquidity for their shareholders. More on this in a second…
When a company “goes public” that means that they sell shares of their corporation to investors. These investors could be large institutions like state pension funds or individuals like you and me. When these investors buy shares, they are exchanging their money for ownership within the corporation that is now being publicly traded. At the initial public offering, also known as “IPO”, the company offers shares for purchase and in exchange, receives the cash that is raised.
In the case of a private company looking to grow, this cash will likely be used to expand distribution of their product or grow the product line itself. In the case of a large established company looking for liquidity, this offering of shares in their company provides a market for the original shareholders to sell all, or a portion of, their interest for cash.
Let’s say you own 10% of the shares in a private company that is worth $10 million dollars. That means your ownership value is $1 million. However, you can’t pay your mortgage or buy groceries with that ownership. You need a liquid market in which you can sell a portion of your shares in order to generate cash. This is an example of a company going public in order to provide liquidity.
Bottom line: Mostly because they're looking to raise money but could be larger companies looking for liquidity.
Bottom bottom line: I wish millennials would stop using made up acronyms. Don't be lazy kids.