Cambridge AS A Level Business Studies/ ZIMSEC Advanced Level Business Studies/ Business Enterprise Skills Notes: Going Private
- A lot of companies start as private limited countries for various reasons
- However eventually a lot of companies eventually “go public”
- Going public-is when a private limited company is converted into a public limited company
- When a private limited company goes public it usually does this through an Initial Public Offering (IPO) i.e
- Its shares are offered to the public for the first time
- This is normally done using an underwriter
- An underwriter is a bank or other financial institution that pledges to buy all the unsold shares in an issue of new shares
- Going public is considered a natural and desirable part of a company’s growth phase
- After a company goes public its shares will now be available for trade on a stock exchange, for example, the Zimbabwe Stock Exchange or Johannesburg Stock Exchange
Reasons for Going public
- To allow early investors to recoup some of their equity usually at a profit. Most companies are funded by venture capitalists and angel investors during their early growth phase. Going public allows these investors to easily dispose of their interest and reward them for taking a risk by investing early in the business.
- To raise more capital-being able to sell shares to the public means that the company now has a larger pool from which it can raise capital.
- To acquire new capital equipment-related to the above but in this case, the business will be looking to acquire specific property, plant and equipment
- To develop new products- for example, to raise more money for Research and Development (R&D)
- Diversifies ownership of the business- as already pointed out above usually most of the stake in private company startups are owned by a few very influential investors. To reduce dependence on these individuals and entities a company might go public.
- Allows early investors of the business to cash in and attain prestige
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