Should Your Company Go Public?
Your business is growing, but not as quickly as it could because you need capital to fuel expansion - to move into new markets, hire more staff, increase service and product offerings and grow more profitable with ever-expanding margins.
Instead of borrowing expansion capital, maybe it's time to consider going public - selling ownership shares of your business to the public.
The best reason to create an initial public offering, or IPO, is to create a diversified source of inexpensive capital that helps your business expand. At the same time, structuring an IPO creates increased visibility and enhances the reputation and image of your business. If you're an owner of the business, going public creates a public market where you can buy and sell shares – in effect "cashing out" some of your ownership stake in the successful business you helped create.
But going public isn't as easy as simply offering stock to outside investors. Your business needs a solid track record of profitability, increasing revenues and reasonable margins in a healthy, growing industry or market sector. Investors want to see a strong management team, a vibrant corporate culture, a sound business infrastructure and growth potential. Lots of growth potential!
In other words, before going public, your business needs to prove its value by performing well over time. Otherwise, why would investors buy stock - an ownership position - in your company?
Other key factors include meeting guidelines for trading on a major exchange like the NYSE or NASDAQ, and determining with certainty that going public generates enough investor interest for sufficient shares to be sold. After all, that's the whole point of taking a company public.
Going public is also expensive over the short and long term. A public company is subject to higher audit and legal fees and higher expenses due to increased reporting and disclosure requirements. The cost of compliance with securities exchange regulations can run into the hundreds of thousands of dollars.
Can You Go Public?
Ask yourself these questions:
- Does your company have a strong balance sheet and solid financial history?
- Does the business have recognizable growth potential and a concrete need for additional capital? In short, can you demonstrate that your business is profitable today, and is likely to expand revenues and increase earnings in the future?
- Can your company find an investment banker or brokerage willing to underwrite (sponsor and promote) your IPO, and offer support and guidance as you work through the process of going public?
- Are you willing to undertake and pay for the regulatory requirements and financial obligations necessary to take your company public?
Advantages of Going Public
The advantages of public ownership should be weighed carefully against the downside of giving up complete control of day-to-day operations. It's critical that you and other owners understand the pros and cons of this crucial business step.
The advantages to preparing an IPO include:
- greater access to capital without taking on debt;
- additional funds raised through subsequent stock offerings and sales of company shares;
- credibility and the enhancement of the company brand;
- employee stock options, bonuses, and other performance incentives that attract the best minds and keep key personnel in place.
Disadvantages of Going Public
There are many disadvantages to an IPO that should be discussed with financial and legal professionals.
The downside to going public includes:
- the initial fees and expenses that can add up to hundreds of thousands of dollars;
- diversion of internal resources required to meet legal, accounting and regulatory requirements;
- the real possibility of an unsuccessful IPO in which investors simply don't purchase shares when they evaluate risk versus reward;
- meeting requirements for disclosure and distribution of company information.
When you go public, shareholders must be kept informed about operations, finances, management decisions - in essence, your company becomes an open book to investors. As a result, you forfeit autonomy and some flexibility in running the business.
Steps to Taking a Company Public
Do the advantages of going public outweigh the disadvantages? If so, here's an overview of the process.
- Find an underwriter. An underwriter is a firm willing to pay a specific price for a minimum number of shares. The underwriter then sells those shares to buyer-investors. An underwriter purchases shares at wholesale and sells them to investors at retail prices - whatever the market will bear.
- Issue a prospectus. The prospectus includes financial and business information about the company. The goal of the prospectus is to attract investors, but this documentation must meet specific securities exchange guidelines and requirements. It's the law.
- Set the share price. The company and the underwriter determine an initial retail price for shares of stock based on the valuation of the company and potential public interest in buying shares of stock.
- The initial share price changes frequently up until shares are released for sale to investors. The share price creates a market capitalization for a company. The number of shares outstanding times the share price equals the company's market cap. For example, one million shares at a $5 share price creates a market capitalization of $5 million.
- Release shares to underwriter. The company releases shares that the underwriter resells at the initial share price. If all shares aren't sold to investors, the underwriter keeps the unsold equity in your company. The company receives the share price for the shares released to the underwriter and can now use those funds to finance expansion.
- Shares are typically purchased by "insiders." Initial shares are not typically purchased by retail (self-directed) investors. They're purchased by business clients or investors who have a relationship with the underwriting firm. In some cases, shares are available through a form of lottery when an initial public offering is considered a "hot" buy on Wall Street.
- Shares trade on the open market. Once initial shares are purchased they can be bought and sold on the open market, typically through a stock exchange. There are large and small stock exchanges around the world and investors who buy and sell shares daily through these exchanges.
So, should you take the company public? Weigh the advantages and disadvantages, and determine whether an offering of stock is likely to be successful. Going public is a great way to generate additional capital, but it can be expensive and time-consuming.
Explore all of your capital-raising options before deciding to let the public into your business life.