The Decline of IPOs: Why More Companies Aren’t Going Public

A recent survey by the research affiliate of Financial Executives International found that publicly held companies on average paid $3.9 million in total audit fees in 2011, while privately held companies reported spending an average of $231,200. Public-company audits averaged about 17,457 man hours, compared with an average of 1,951 for private-company audits. Additionally, the direct costs for a $50 million IPO are about $5 million.

Market Volatility

Owners of privately held companies are smart, and they know they potentially have a lot to lose in the volatility of public markets. People who are being thoughtful about their businesses would tend to question whether they want to see the company’s net worth or the shareholder value go down – not always directly because of company performance.

Every day, events outside of a public company’s control have an effect on that company’s value, which is unsettling.

Entrepreneurs of Today

For a long time, one of the reasons for doing an IPO was that everybody else was doing it. It was a status symbol. But I don’t think the entrepreneurs of today care as much about that. Good for them.

This generation seems to be more educated and thoughtful about options for accessing capital.

Historically, the desire for alternatives to existing U.S. exchanges has always led to the creation of new ways for company shareholders to sell and buy ownership stakes — the creation of the NYSE to help traders find each other more easily along Wall Street, the curbside brokers who created the American Stock Exchange, the electronic trading developed by NASDAQ. Technology continues to make it easier and cheaper for people to find such alternatives. On balance, this is a very good thing.

For many private-company owners, the lure of ringing the bell on a stock exchange just isn’t there anymore. Why should it be? That bell is an expensive one.

Editors Note: Mary Ellen Biery, Research Specialist at Sageworks, contributed to this article.

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Photo Credit: New York Stock Exchange

Brian Hamilton is the co-founder and Chief Executive Officer of Sageworks, an Inc. 500 company. He is an original co-developer of FIND (Financial Information into Narrative Data), Sageworks’ patented artificial intelligence technology which converts financial numbers into plain-language reports. “FIND” is the basis of ProfitCents® and Sageworks Analyst®, applications that are used by thousands of financial institutions and accounting firms throughout North America and the United Kingdom.

Brian is a noted expert on privately held companies whose expertise has been featured in hundreds of national TV and radio interviews and print articles. He is currently a guest columnist for Forbes and Inc.com. Brian also oversees Inmates to Entrepreneurs, a community outreach program focused on teaching ex-offenders to start low capital businesses.