What’s Flotation?
A private firm becomes public by issuing shares for sale during a flotation. Companies might use external finance instead of retained earnings to support new initiatives or expansion. British people use “flotation,” while Americans use “going public.”
Understanding Flotation
Timing, corporate structure, public attention, regulatory compliance expenses, and time to complete the float and attract new investors must be considered. Since flotation opens up new funding sources, the extra costs of issuing new shares must be considered before going public.
Companies with mature growth may require more financing for expansion, inventories, R&D, and new equipment. The effort and money needed to become a public corporation are frequently worth it.
A firm seeking flotation usually hires an investment bank as an underwriter. An underwriting investment bank leads an IPO and helps the firm choose how much to raise from the public market.
The investment bank helps with public business documents. The bank will create an investment prospectus and conduct a roadshow to promote the company’s offering before the initial stock sale. At a roadshow, the underwriting firm and top management team of a business going public pitch potential investors. Assessing demand during the roadshow is crucial for setting the final IPO share price and the number of shares to issue.
The Pros and Cons of Flotation
Before becoming public, firms may seek out alternative private investment sources for money. Alternative funding options include small company loans, equity crowdsourcing, angel investors, and venture capitalists. Companies seeking private investment will still pay legal expenses, transaction structuring fees, and accounting fees.
Many private firms get private financing to reduce transparency. Private enterprises may want to stay privately funded due to the high expenses of restructuring and IPOs.
Conclusion
- Flotation, or “going public,” sells shares to the public to turn a private corporation public.
- While flotation gives a corporation additional funding sources, the added costs of issuing public shares must be considered before going public.
- Companies with mature growth may float to raise funds for expansion, inventories, R&D, and new equipment.
