Weighing Up The Advantages And Disadvantages Of Listing
The allure of going public is ever present in the minds of firm owners. However, family business owners who are seriously contemplating going public need to weigh up the advantages and disadvantages of listing on the Australian Stock Exchange.
MotivationFamily business owners also need to be clear about their motivation for listing. For instance, is the intention primarily to refinance the firm by using external funds rather than through internal funds, or are existing founders and other holders of stock who have a considerable amount of wealth invested in the firm seeking to liquidate and diversify their personal investment portfolios? When considering issues of refinancing, a public listing might be one of a limited number of sources of funds available to the firm. In some cases it might be the only alternative. The flotation of a company is an attractive form of financing, offering substantial benefits to the firm in comparison with other financing mechanisms. For example, with the exception of dividends, there are generally no servicing costs associated with equity. In contrast, other forms of finance such as debt require regular repayments.
A public listing is also generally a far more simplistic route to off-load part or all investment, in contrast to selling shares back to the firm, which will need to finance the buy-back from valuable internal sources. Indeeds, if the firm has a stable and profitably trading history and the market is opportune for quality investments, a public listing may well be a profitable exit strategy for existing holders of stock.
DisadvantagesHowever, there are several potential disadvantages associated with public listings. One of the most documented of these is the enormous cost involved in the initial public listing process. This process is lengthy and complicated, often involving many parties, including representatives of the issuing firm, underwriters, financiers, auditors and corporate advisory specialists, lawyers, marketing experts, and various other experts. There are also numerous regulatory and compliance mechanisms to be observed including the requirement to prepare a detailed prospectus. In the US, it has been estimated that the average cost of an issue is around 6 per cent of the total issue proceeds, whereas in Australia it is around 7.5 per cent of the total issue.
Other potential disadvantages arise from public exposure. A listed company in Australia is required to comply with several financial and other ongoing disclosure requirements. They include compliance with the listing rules of the Australian Stock Exchange and the various provisions of the Corporations Law. In addition to reporting requirements applicable to all relevant companies under the law, listed companies must also comply with the disclosing entity provisions of the Corporations Law. This means that listed companies must prepare comprehensive audited financial statements on an annual and half-yearly basis. Moreover, these are ongoing requirements and for many companies compliance is onerous and expensive, often requiring the establishment of large accounting systems and specialist departments.
Other potential costs that might arise from greater public exposure are costs associated with competitors exploiting company information from detailed information disclosed in financial statements, and the potential costs of defending a takeover bid for shares in the company. Thus, owners need to be clear about their motivation for listing.
This article has been extracted and adapted from Nicholas A. Mroczkowski's unpublished doctoral dissertation, "Initial Public Offerings in Australia: Initial and Aftermarket Performance of Family and Non-Family Businesses".
George Tanewski is Senior Research Fellow in the AXA Australia Family Business Research Unit at Monash University. Dr Tanewski writes extensively on family business issues and also sits on the board of a prominent Melbourne family business. For further information please contact George Tanewski on 61-3-9903-2388 or george.tanewski@buseco.monash.edu.au
First published: 24 April 2001.
Last updated: 6 October 2005.