Initial Public Offering Costs - What Are The Costs Involved In IPOs?

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By Abhishek Agarwal

In business, the benefits come with their costs.

For instance, consider the case of a person with a homemade meat business, you have to spend for raw materials like spices, meat and packing expenses and market your product, Then you have to rent a premises to sell your product. So, every business needs an initial investment of time and money for it to be successful.

The cost price is of course the total amount of funds you should use to buy something. Whatever the kind of business you are looking at, you have to spend a certain initial capital to produce a product and sell it later on a price that will give way to profit.

The common expenses that are included in the initial capital investment could be a few of the following:

1. Production costs (including raw materials, machine maintenance if any, and others)

2. maintenance costs like the office, manufacturing plants , vehicles, machines etc.

3. Personnel costs such as factory employees, staff and retailers

4. Advertising and PR costs

5. Miscellaneous expenses.

A cost that the company may face later is gathering funds to raise additional capital to support the growth of production or business expansion possible. One method used to raise additional funding for a company is the IPO, or initial public offering. It needs you have to prepare thousands of dollars for the process of selling the shares you issued in public.

Have you considered costs that you incur when your company will process the IPO?

An IPO is the 1st sale of a joint venture shares to the public. It calls for several investment banks, which will serve as underwriters for the procedure. The company who sell their shares will enter into agreement with the primary insurer to sell those shares to the investing public. The insurer, in exchange will offer shares to traders who want to buy at a price.

The long process of the IPO, you will certainly incur costs, which depends on the stage of the process. For example, one step in the IPO process is completion of the disclosure of documents, which is essential to convince investors about the viability of its IPO. The absence of any well-defined business plan that you need to submit to the yield to investors, difficulty in answering questions of disclosure of the document. In most cases, the business plan will run for 25 to 100 pages, and can cost you about $ 5000 to $ 20,000 on a single step alone.

To put it in a nutshell, the typical business company can spend more than $ 750,000 as direct costs related to the IPO. This is excluding indirect costs like management time spent with the IPO, like disruption of operation, when the company is under the IPO and a team of planners IPO-consultants , insurers, lawyers and specialists.

It’s really expensive to go to IPO. So if you are planning on that do make sure you have the finances associated to pay for the costs associated with your initial public offering.

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January 18 2008 09:28 pm | Stock Market Investing Tips

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