Interested in taking your company public? The main reason people explore the possibility of going public is that they want to raise capital – to expand their company, to hire new people or to open more locations.
Like most of your tough business decisions, taking your company public has advantages and disadvantages. There are a host of reasons for companies to consider going public.
Going Public Advantages
Companies that are in a growth mode are often strapped for the capital necessary to fuel that growth. An IPO offers access to additional capital both through the IPO itself and through following on secondary offerings of securities. By offering stock for sale to the public a company can access a substantial source of corporate funding.
If a company needs to raise capital, it can sell stock, equity in their company, or it can it issue bonds (debt securities). An initial equity offering can bring immediate proceeds to a company. These funds may be used for a variety of purposes including; growth and expansion, retiring existing debt, corporate marketing and development, acquisition capital and corporate diversity.
This is probably the #1 reason companies go public.
Public company status enhances the liquidity of the stock held by founders and other early stage investors. A company backed with outside capital must have an exit strategy. Going public is one of the most common techniques to achieving liquidity for early investors such as venture capitalists.
By taking your company public, a company creates a market for its stock in which buyers and sellers participate. In general, stock in a public company is much more liquid than stock in a private enterprise. Liquidity is created for the investors, institutions, founders, owners and venture capital professionals. Investors of the company may be able to buy or sell the stock more readily upon completion of the public offering.
Acquisitions & Mergers
Once a company is public and the market for its stock is established, the stock can be considered as valuable as cash when acquiring other businesses. A successful IPO can have a dramatic effect on a company’s profile, perceived competitiveness and stability. This perception can lead to expanded business relationships and added confidence in the consumer.
Because a public company’s stock is relatively liquid, it can be used as the currency to acquire other businesses and fuel further growth. Many owners of successful private enterprises are happy to sell their businesses in exchange for the marketable securities of a growth company.
The specter of a public offering, coupled with the grant of restricted stock or stock options, is often used by start-up enterprises to attract key employees. Many companies use stock and stock option plans to attract and retain talented employees. And the grant of stock interests after a company has gone public can be an attractive motivational device.
An allocation of ownership or division of equity can lead to increased productivity, morale and loyalty. This type of compensation is a way of connecting an employee’s financial future to the company’s success.
Many companies simply enjoy the prestige and status that comes with being public. For some, it can even provide a competitive advantage. Prestige can be very helpful in recruiting key employees and marketing products and services.
When sharing ownership with the public, you spread the company’s reputation and increase its business opportunities. By selling stock on an exchange your company can gain additional exposure and become better known. This exposure may lead to improved recognition and business operations.
Going Public Disadvantages
Becoming a public company does carry its share of burdens. Consider the following downsides and disadvantages of going public:
Time & Expenses
An IPO is an expensive and time-consuming undertaking. IPO’s can take several months to complete. A typical firm may spend about 15-25% of the money raised on direct expenses. The typical fees to the underwriter might run 7% of the total deal, with other fees and costs totaling several hundred thousands of dollars. Of course, if the transaction is successful, these costs are netted out of the proceeds of the offering.
Once public, a company needs to budget for the management time and ongoing expenses associated with preparing and disseminating reports to shareholders, making prescribed regulatory filings and dealing with financial analysts, shareholders and other interested parties.
A major reason why firms resist going public is the loss of confidentiality in company operations and policies. Perhaps the most difficult matter for private companies to come to grips with is that they must, by law, disclose the intimate details of their business operations, products, marketing strategies and management compensation, as well as their financial statements. Such detailed disclosure can have adverse effects.
For example, if your company is in a high-margin business and has historically kept its financial information private, you might expect a call from your significant customers (and a jab from a competitor or two) when they see your margins.
Public company status entails some loss of control by the founders, evidenced by their shared ownership of the business with the public and, typically, a new and independent board of directors. The founders can no longer run the business solely with their own interests in mind; they must also consider the interests of the public shareholders.
Outsiders are often in a position to take control of corporate management and might even fire the entrepreneur/company founder. While there are effective anti-takeover measures, investors are not willing to pay a high price for a company in which poor management could not be replaced.
Public companies must continuously file reports with the SEC and the exchange they list on. They must comply with certain state securities laws (“blue sky”), NASD and exchange guidelines. This disclosure costs money and provides information to competitors.
Many company’s choose to join the ‘Pink Sheets‘ which offer relaxed reporting responsibilities. To be quoted in the Pink Sheets, companies do not need to fulfill any requirements (e.g. filing financial statements with the SEC). However, most do not meet the minimum U.S. listing requirements for trading on a stock exchange such as the New York Stock Exchange. Many of these companies do not file periodic reports or audited financial statements with the SEC, making it very difficult for investors to find reliable, unbiased information about those companies.
The securities markets can be fickle and unforgiving, and focused on short-term performance. A hot industry today may be in the dog house tomorrow. Further, the price of a company’s stock is largely dependent on how the company performs against the expectations of financial analysts, not necessarily against its own past performance. If analysts expect a company to achieve a certain earnings per share in a given quarter, and the company falls short, its stock will literally pay the price – even if its results are significantly better than its prior quarter!
So is it worth taking your company public? That’s a decision that each company needs to make based upon its own set of goals and motivations. To be successful as a public company a firm must have a business plan that has been well thought out, a product or service that is in demand and a good management team.
For many entrepreneurs, however, even with its burdens, going public is the fulfillment of the American Dream.