Various Considerations for an Initial Public Offering (IPO) (Research Paper Sample)

Various Considerations for an Initial Public Offering (IPO)
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Introduction
An Initial Public Offering is the first-time sale of a company’s stock to the public for purposes of raising additional funds to finance expansion and other business-related operations. An IPO is thus an importance debt-free source of funding for business organizations looking to increase their capital base. One of the major advantages of using an IPO to raise capital is the it helps the business to avoid getting into debt by raising funds through borrowing, for example taking bank loans. In addition, an IPO raises the company’s level of public reputation and sense of prestige because it becomes better known and more visible compared to private entities. Moreover, an IPO creates wealth for the business’s founders by allowing them to convert the equity of the company into money. Nevertheless, there are a number of considerations that businesses and business owners should make prior to undertaking an Initial Public Offering. These considerations have to do with the risks, ownership level, and responsibilities associated with publicly traded companies. This essay discusses the various considerations for an Initial Public Offer.
Within the context of an IPO, a consideration is the property or services exchanged for stock. For an outsider to become a shareholder of a company and effectively own a piece of it, they must pay something in return with a monetary value.
The most common and preferable consideration for an IPO is cash (Schmitz, 2012). The preference for cash results from its flexibility in terms of usage and convenience in terms of providing accurate valuation of a company’s stock. For instance, it is more accurate to value a stock in terms of money compared to services, such as using stock options to pay for legal services. It will be difficult to determine with accurate the amount of services that are equivalent to a given number of shares in a business. At the same time, cash is convenient when the company needs resources to expand its operations as opposed to paying off its debts.
Employee compensation is another form of consideration for an IPO when the management wants to offset its wage liability and promote employee loyalty (Schmitz, 2012). Most companies use stock options as rewards and benefits for long-serving employees (Wolff, 2012). This consideration is convenient and less costly when the business does not have the money to pay employees creditors. For instance, an employee who is retiring can be offered shares in place of pension benefits, and this will save the company money and the burden/cost of raising the required amount. The saved money can be reinvested in the business or diverted to other profit-generating ventures. Likewise, a business can pay off its debts through an IPO, and using the saved money for other ventures.
Thirdly, businesses can accept property/assets in exchange for shares for the owner of the property (Thursby, 2016). This is especially preferable when the company can easily and profitably convert the property into cash, or the property is a capital asset that the business can use for its operations. For instance, a real estate development company can give part of its shares in exchange for a prime piece of land, which it either sell or develop.
Nevertheless, there are a number of factors to take into account before agreeing to undertake an IPO. The most important factor is the amount of money that a business needs to raise through external funding is important in determining whether an IPO is necessary. This is because a business requiring minimal financing will more conveniently raise the money through short term loans and other credit facilities available to businesses (Bonnie, Thacher & Gould, et al., 2017). The amount will depend on the type and nature expansions and operations the management plans to undertake using additional capital. For instance, adding a few distribution channels within the existing market is not an expensive undertaking, and accordingly, the business can easily get the required resources through a short term loan or reinvesting of profits, thereby rendering an IPO unnecessary. On the other hand, an IPO will be necessary if the management plans to undertake considerable expansion and reorganization of the...