Costs of public offering:

Corporations weigh the costs and benefits of an IPO carefully before deciding on an IPO. The most obvious cost of having an IPO is the expense. It costs money to raise capital. The legal fees, printing costs, and accounting fees associated with registering an IPO can run into a huge amount of money. On top of those costs, the rules for making a company into a public one are so complex that most companies have to hire experts to handle all the paperwork. As far as shareholders are concerned, they themselves  constitute another drawback for the issuing firm of going public. The original primary owners are no longer in a private company that can make independent decisions. The investors who purchased stocks at the IPO own a certain percentage of the business, and their demands cannot be ignored, even if they don't have a controlling interest (more than 50% of the shares) in the company. The company's new owners will expect a certain return on their investment, subjecting the management of the firm to tremendous performance pressures. Substantial time and effort, and thus money, must be expended in dealing with the investing community in order to ensure that investors and analysts remain satisfied with the company's performance over the short term, while at all times keeping in mind, and working towards, management's long term goals for the company. Shareholders also want to see the value of their stocks rise, so if the stock price drops or remains stagnant, the company will have to deal with unhappy owners, who are, of course, part owners.

If they become unhappy enough, they may sell their stocks, which will cause the value to drop further, decreasing the overall value of the company. Another drawback for a company making public offerings is that offerings have certain legal aspects that must be followed. Public companies are also open to public scrutiny. Annual financial reports, internal transactions, and balance sheets are all open to inspection.

This is more of a problem for some companies than others, particularly companies who might have made deals that are not legal or have altered or tampered with financial reports.

An IPO is not without its disadvantages. The biggest consideration for many companies is the substantial out-of-pocket expense that is involved in preparing an IPO for market. As compensation, the underwriter who agrees to take on the IPO in a firm commitment offering purchases the stock to be offered to the public at a discount from the public offering price, sometimes as much as 9% or more but more typically 6 or 7%, depending on the size of the offering and the risks the underwriter might face in bringing a company to the market. Lawyers, accountants, and financial analysts will also command significant cash outlays months before an IPO even hits the market.

Undertaking an IPO is a business decision that must be based on consideration of a number of factors that indicate whether an IPO is an effective use of the company's- and its management's- time and resources. Balancing key characteristics of a company, such as size, stability, product lines, markets, and management, determines whether an IPO is advisable and, ultimately, whether it will be successful. Investors often look for companies whose debt-to-equity, liquidity, and debt coverage ratios meet or exceed  industry averages. In addition, investors generally look more favorably upon an IPO, the proceeds of which are to be used for  long-term growth and expansion, rather than to pay off debt, or fund a return of investment to certain insiders.