Business Staying Private or Going Public Essay

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Staying Private or Going Public: Thoughts and Considerations

Many companies that develop to a particular size will view the act of going public as an organic step in their natural journey. Even so, many companies still choose not to go public and still enjoy relative success, while still remaining privately owned companies. Whether or not to go public is a big decision, one that offers many benefits. At the same time, not all public forays experience success and accomplish the goals they set out to do. Making a step into the public foray will have a big impact on the overall financing of a company, and the leaders need to understand that such a move is not their only option. Going public can often open the door to unexpected challenges and obstacles that one has a duty to weigh into consideration.

· Outline three (3) ways in which your medium-sized private company may benefit from going public, providing a rationale for each.

Some firms might find themselves at a plateau in their development where they need additional financing sources and a higher level of access to their own equity. Going public might be useful if their private equity is not open to them at the time, or generally too pricey. In such a case, going public may be a useful option as long as the company is able to fulfill specific demands in regards to size, the management team, development potential and the overall market valuing (Moorhouse, 2007). The main advantages to going public are as follows: Availability of useable long-term capital. This advantage is probably the biggest reason as to why some companies decide to go public. “As most companies are financed by a mixture of private and bank finance as well as retained earnings, these original sources of finance may become limited in funding a company’s continued growth. The main reason to go public is to raise funds in a cost-efficient way to finance operating or growth objectives” (Moorhouse, 2007). When a company goes public it suddenly has access to a host of other funds, allowing that to diversify and to extend the investor foundational level. This means that all the problems attached to how the company was going to bankroll its growth and investments or refinance existing debt, have all but disappeared (Moorhouse, 2007).

This advantage leads to the next advantage, which is a more empowered and favored financial status. When a company sells “…shares to the public, a company increases its equity which can in turn be leveraged to finance growth. The issuing of equity will have an immediate impact on the debt to equity ratio and improve a company’s balance sheet leverage” (Moorhouse, 2007). This has a consequence of empowering the company to be able to borrow increasing funds, if they are needed because the company now has a higher level of visibility. A final benefit of going public is that it does have an impact on the company’s level of prestige within its industry and within the business world as a whole. This can have an almost immediate impact on a company’s number of consumers and create increased awareness of the firm, almost overnight.

· Create an argument that the same goals may be achieved if the company remains a privately held entity. Provide support for your argument.

Numerous advantages abound to remaining a private entity and nearly all of a company’s goals can be achieved while maintaining such a status. The first benefit of staying private means that a company can enjoy the freedom of not having to deal with public scrutiny. This can be powerful for a company’s success during difficult market times (Steinlauf, 2014). Remaining private means that a company can deal with crises in the best way that it sees fit, regardless of what social pressure dictates. “For instance, had Edmunds.com been forced to address the market’s expectations during the 2008/2009 contraction in our industry, we almost certainly would have had to gut our organization to slash costs. However, our executive team had a firm belief that the financial crisis would be temporary, and as a private company, we were able to take a calculated risk to maintain our workforce” (Steinlauf, 2014).

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In the case of Edmunds, staying afloat meant that they had to make additional long-term investments in infrastructure. It was a risky move but it meant that they didn’t have to lay any of their members of staff off. This was something that would have been nearly impossible to achieve if the company was public.

Another advantage of staying private is that there are few headaches given to the company as a result of the intense demands of the requirements put forth by the SEC, including compiling detailed quarterly reports, dealing with investor demands and the auditing of third parties (Christenson 2014). When a company isn’t forced to exert all that energy on requirements, they can focus on their own innovation and development.

Another major advantage of remaining public is that the company can maintain its overall management flexibility. The management of private companies is in charge of making all relevant decisions, as they see fit. Public companies have the onerous obligations of receiving approval from shareholders in particular scenarios. This can create a more subdued management culture, which can stifle speedy decision-making and certain lateral moves that need to be made.

· When a company decides to go public, it can typically obtain capital by issuing stocks or bonds. Suggest four (4) leading financial ratios that will be evaluated and how each will impact the company’s decision to obtain expansion funds. Determine whether the results of the ratios would alter the decision to go public. 

The first of the four leading financial rations to assess and evaluate how it can assist in influencing the company’s decision to receive expansion funds will be a liquidity ratio. A liquidity ratio determines the amount of liquid capital (such as cash or easily converted funds) that one has to deal with debts, and which offers a wider perspective of one’s financial health (bdc.ca, 2017). The most commonly used liquidity ratio “…is calculated by dividing your current assets—such as cash, inventory and receivables—by your current liabilities, such as line of credit balance, payables and current portion of long-term debts” (bdc.ca, 2017). Essentially this ratio is so important as it determines a company’s ability to create cash to meet immediate financial responsibilities; it is often referred to as the working capital ratio (bcd.ca, 2017).

In addition to this ratio, it would be useful to also imply a quick liquidity ratio, just as a means of taking the company’s proverbial temperature. A quick ratio determines the company’s ability to get into cash rapidly to deal with immediate needs. Some professional refer to this as the “acid test” (bdc.ca, 2017). To calculate it, all one needs to do is divide “…current assets (excluding inventory) by current liabilities (excluding current portion of long-term debts). A ratio of 1.0 or greater is generally acceptable, but this can vary…” (bdc.ca, 2017).

Another very crucial ratio to use will be an inventory ratio. Nearly all companies have inventory, even companies that are service-based. Inventory turnover examines how much time elapses before the good need to be replaced through a 12-month cycle. “It is calculated by dividing total purchases by average inventory in a given period” (cbd.ca, 2017). It’s such a crucial factor for success as so many businesses are dependent on getting inventory sold.

The final financial ratio to be used would be one that would provide net profit margin in order to determine how much the company is actually bringing in, in terms of profits after taxes, relative to sales. It’s important that we maintain a high profit margin than competitors as that would signal a higher level of competence, capabilities and a freedom to try new things.

· By researching the results of SOX compliance surveys, assess the financial impact that SOX might have on….....

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