Negative Things About Selling Stock
Selling stock through an initial public offering (IPO) can be viewed as a positive step on the path to success for a business that was previously privately owned. Although stock sales can provide a large influx of debt-free capital, there are a number of negative aspects of selling stock that private business owners should consider before incorporating. Weighing the pros and cons of selling stock can help you to make the best financing decisions for your company.
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Time and Cost
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Selling stock can be more costly and time consuming than other financing options, such as loans or private investment. First-time stock sales require investment bankers to ensure that the sale is marketed and executed as effectively as possible. This adds a layer of expense to the equation, as investment bankers charge sizable fees for their services. The process of organizing a company for incorporation and completing the administrative requirements of the transformation take more attention from a wider range of employees than simply applying for a loan or line of credit.
Management Control
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Whoever manages a company before it sells stock, whether it be company owners or employed managers, runs the risk of losing all control over the company after its incorporation. In corporations, the stockholders vote to select members of the board of directors, and the board directly appoints the executive management team. If the stockholders elect board members who believe fresh management is best for the company, the original managers can find themselves standing on the sidelines.
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More Stakeholders
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Strategic decision-making can be less efficient in corporations than in privately owned businesses. Because companies have a wider range of stakeholders after selling stock, including the board of directors and government regulators, the process of designing new strategic initiatives can become bogged down, making radical change virtually impossible. This can cripple companies in industries that require leaders to adapt quickly to evolutions in the marketplace.
Reporting Requirements
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Selling stock introduces companies to a new world of legal regulations, requirements and related expenses. Corporations are required to submit detailed financial statements and other disclosures to the Securities and Exchange Commission (SEC) on a regular basis. Not only does this cost more time for company accountants, but it can force companies to use the services of expensive legal consultants to ensure their continued compliance.
Hostile Takeovers
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A privately owned business cannot be sold without the owner's consent. After selling stock, however, companies become susceptible to hostile takeovers. In a hostile takeover, a larger company or wealthy investor privately purchases more than 50 percent of a company's stock without the approval of management or the board of directors. Once the purchaser owns a majority stake in the company, it controls strategic company decisions, even the decision to close the company, layoff its workers and sell its assets for a profit.
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