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Initial Public Offering Costs: Beyond the Limelight
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In business, profits always come with costs.
For instance, if you own a homemade ham business, you need to spend for the raw materials (raw meat, different spices, and packaging) and for the marketing of your homemade ham (renting a stall in the meat section of a market) before you will be able to receive your profits out of the products that you have sold. In other words, if you will not spend initially on something, there is no chance that you will generate any profits later on.
In business, costs are defined as the amount of money that you need to use to acquire something. Whether you have homemade ham business or trading foreign currencies for a profit, you need to spend some amount of money to acquire or produce a particular product and later sell it on a price which will yield to profit. That is what is referred by most investors as the cost.
What are the common expenditures that every company must address? These are, but not limited to, the following:
• Production costs (includes raw materials, machine maintenance if there is any, electricity, crude oil used for machines, and others);
• Maintenance cost (includes maintenance on the facilities such as the manufacturing plant, business office, machineries, automobiles for deliveries, and others);
• Personnel cost (manufacturing plant workers, office personnel, delivery personnel, and retailers);
• Advertising (public relations, print and broadcast media advertising, Internet advertising, and others); and
• Other operation-related miscellaneous expenses.
Another cost-oriented element that a company may incur is raising additional capital to sustain growth in production or possible business expansion. One of the methods used in raising additional finances for a company, which is the IPO or the initial public offering, requires you to prepare thousand of dollars along the process just to sell the common shares that you issued to the public.
What are the actual costs that you may incur when your company will undergo the IPO process?
Initial public offering is the first sale of a company’s common shares to the public. It involves several investment banks that will serve as the underwriters for the process. The issuer or the company that will sell their common shares will enter an agreement with the lead underwriter to sell such shares to interested public investor. The underwriter, in return will offer the shares to investors who want to purchase it for a price.
Along the IPO process, you will definitely incur costs, which is dependent on the stage of the process. For instance, one of the stages within the IPO process is the completion of disclosure documents, which is vital in convincing investors with regards to the viability of your IPO. The absence of any well-defined business plan that you need to present to the investors will yield to difficulty in answering the disclosure document questions. In most cases, the business plan will run for about 25 to 100 pages, and may cost you around $5,000 to $20,000 on just a single stage alone.
If you will sum it, a typical business firm may spend as much as $750,000 worth of direct costs related to an IPO process. Take note that it does not yet include the indirect costs such as the management time spent on the IPO, the disruption of the operation while the company is under IPO, and a good team of IPO planners—consultants, underwriters, lawyers, and specialists.
It is really costly to go on IPO. So the next time you plan to sell the common shares of your company make sure that you have enough funds that will shoulder the costs related to your initial public offering process.
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