Should
You Go Public?
For many entrepreneurs, a successful
IPO represents the pot of gold at the end of the rainbow.
It provides an opportunity to unlock all of the value and
"sweat equity" that has been created through years
of hardship and deprivation. It can mean access to the precious
capital that is so critical to the growth of a small business.
And for many, an IPO is seen as the most tangible and telling
evidence of the success of their venture.
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Stories of small-time boot-strappers
scoring big in massively valued IPO's abound. It is no secret
that a well-orchestrated IPO can lead to impressive wealth.
What is not as well-publicized, is the fact that going public
has more than its fair share of risks and headaches. So, before
making the decision to undertake an IPO, take the time to
weigh the advantages and disadvantages of going public. Consider
very carefully whether transforming your company from a tightly
controlled private company into a highly scrutinized and regulated
public company is really the best thing for your business.
Advantages of Going Public
1. Increased access to capital.
This is probably the most important factor in the decision
to go public. Capital will provide the means for you to expand
your operation quickly and build a dominant market presence.
2. Increased liquidity. Going
public will create a measure of liquidity for your firm's
stock that is generally unavailable for most small private
companies. This liquidity will allow you to sell a portion
of your own stock (subject to SEC regulations) and diversify
your own asset holdings. It will also allow you to issue marketable
stock options to key employees as an incentive for their continued
loyalty to your firm.
3. Ongoing access to capital
markets. Once your company is publicly traded, you will
generally find it easier to find willing investors to provide
either debt of equity funding for your business (assuming
that your company is doing well).
4. Increased employee retention
and productivity. As a publicly traded company you will
find it much easier to attract and keep the quality talent
that will be so vital to the success of your business. This
will be particularly important as you experience rapid growth.
The ability to issue marketable stock options to key employees
as a sign-on bonus or as a loyalty incentive can confer a
significant competitive advantage on firms whose stock is
publicly traded. This is particularly true when the labor
market is tight.
5. Creation of personal wealth.
A successful public offering has the potential to significantly
increase your personal wealth. While the obstacles and headaches
may sometimes seem insurmountable, the payoff can be enormous.
6. Less equity dilution.
As a general rule, public offerings tend to preserve more
of the equity in the business for its founders than private
placements and other forms of equity financing. This is because
a public offering is more widely advertised than private placements.
Market competition results in a more equitable distribution
of stock relative to value.
7. Improved financial position.
The proceeds from a successful public offering will have an
immediate and dramatic positive impact on your balance sheet.
Your debt to equity ratio will decrease and your liquidity
will improve. You may also become a better credit risk for
prospective lenders.
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Disadvantages of Going Public
1. Disclosure requirements.
As a public company, you will be required to disclose detailed
financial and operational information to the general public.
Sensitive information regarding sales, profitability, and
salaries of officers and directors will become a matter of
public record. Customers, competitors, employees, and others
will be able to freely access and peruse information that
was once closely guarded.
2. Continuous profit pressure.
Public companies quickly find that they must continually strive
to maximize shareholder value. The capital that shareholders
entrust to your company will come at a high emotional price.
As shareholders seek to maximize the return on their investment,
they will demand higher and higher levels of profit - each
quarter and each year - into perpetuity. These unrelenting
profit expectations can quickly become onerous. Running a
public company is not for the faint of heart. It requires
a tremendous amount of maturity, patience, political acumen
and a great deal of hard work and focus. Managing shareholder
expectations and delivering an acceptable performance on a
consistent basis can be extremely stressful. Sometimes these
shareholder demands will result in poor management decisions
as short-term profits take precedence over long-term investment
decisions.
3. Onerous reporting requirements.
As a public company you will be required to report on your
financial performance to satisfy the SEC and your shareholders.
Because your shareholders will generally not be involved in
the day-to-day management of the company, they will pay very
close attention to these financial reports. Consequently,
the preparation and presentation of quarterly and annual financial
and operating statistics and trends will consume an inordinate
amount of senior management time and attention. Indeed, these
reporting sessions can become quite distracting.
4. Loss of control. As the
principle shareholder of a privately held company you enjoy
a great deal of control over strategic and operating decisions,
financial expenditures, and company growth. However, as soon
as you take your company into the public domain, this freedom
and control is severely diminished. New stakeholders in the
public entity will want to ensure that their interests are
protected. They will demand representation on the board of
directors where they will be in a position to exercise significant
influence over corporate decisions. If your equity stake becomes
sufficiently diluted over the course of time, you may find
yourself on the outside looking in - particularly if the company's
performance is not consistently meeting expectations.
5. Going public is costly.
There are significant costs associated with a public offering.
These up-front costs include fees to underwriters, attorneys,
and accountants as well as significant printing fees. In addition
to these initial expenses, you will be faced the ongoing expense
of producing and distributing quarterly and annual reports
to shareholders and regulatory agencies.
Are
You Ready to Go Public?
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