It would be erroneous to assume that the IPO implementation process is a challenge-free undertaking. In order to benefit from the aforementioned merits of an IPO, a public company and its shareholders have to be able to meet certain challenges. These are:
1. Share price of a public company is exposed to the stock market fluctuations
Regardless of how well the company is managed, in certain circumstances imposed by the external market, price and liquidity of the shares may drop.
For example, smaller companies may discover that their shares are not sufficiently liquid, while the medium-sized and large companies may experience share price movements based on unfounded market expectations, general economic trends, or even unrelated events in the industry, sector or country. In order to minimise the influence of such unfavourable events on a public company’s share price, the management should retain constant communication with the market and investors, keeping them informed about the company’s current developments and prospects.
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The interests and expectations of the minority public investors must be taken into consideration
Sale of an equity stake during the IPO inevitably transfers a certain degree of influence to the new public shareholders; their interests and opinions must be considered going forward.
This means that the owners of a formerly private business are no longer allowed the same autonomy in making strategic decisions.
In order to satisfy current expectations of the public investors, the company might need to achieve the short-term operational goals at the expense of the longer-term strategic prospects.
3. Wide-ranging disclosure requirements and financial reporting
The IPO implementation process and a listing on a reputed stock market are only possible when the company discloses the necessary financial information and provides periodic financial reporting of scope and quality substantially in excess of those required from a private company.
For example, a public company must disclose the names of its ultimate beneficiaries, provide detailed information about the financial position and development plans, disclose remuneration of the directors, and other relevant information.
Substantial investment in the IPO process
Aggregate investment in the IPO process on a leading stock exchange (such as the London Stock Exchange) may be quite significant. Even though most of these expenses will be reimbursed from the funds raised during the IPO and therefore will not impact the operating results of the company, a part of the preparation expenses will have to be funded by the company’s own resources before the IPO takes place.
Thus it is necessary to plan the investments into the IPO process carefully.
New responsibilities and restrictions for the management
The IPO process, as well as the ongoing responsibilities that arise from the new public status, require substantial amounts of the executives' time that otherwise might have been spent on the operational business.
The directors and executives of a public company also face certain restrictions, for example related to dealings with the company shares and disclosures of the market-sensitive information.
Hence the activities of the directors and top management of public companies are more regulated and require additional attention.