Do you know what an IPO is? An initial public offering (IPO) is basically the first sale of a company’s shares to the public, which is why it is also called “going public.” Usually, but not always, an initial public offering involves shares in a young and not well-known company. The most compelling reason to go public is to raise cash for operating capital. But there are ties…
After the demise of the dot-coms, the scandals at Enron, WorldCom, Tyco and Global Crossing, the IPO landscape has changed. Taking a company public is no longer an automatic decision, even for those companies that are good candidates. Oh, there are many reasons to go public: access to capital, increased liquidity, employee compensation, publicity, and prestige. But before you jump on the “public” bandwagon, make sure you’ve considered the following points.
Do you have a golden parachute handy?
Any time you hire a financial partner, you risk losing control of your company, and maybe even the company. Jim Clark, prior to his huge success with Netscape, was essentially forced out of his first company, Silicon Graphics, by the venture capitalists he initially partnered with to get started.
Some business owners chafe at the limitations of being a public company. Virgin’s Richard Branson is a good example. After taking his company public, Branson discovered that he really did not like sharing the profits and working with outside directors of the company. Branson and his management team eventually executed a management buyout to take the company back private.
Research available takeover measures and include them in your initial public offering, if possible. Remember, though, that investors won’t be willing to pay a lot of money for a company where management can never be replaced.
sexy enough?
Your business must have “investor appeal.” This means that your industry, services or products are extremely popular with consumers and therefore very attractive to investors. If your product or service isn’t “sexy”, going public is not for you because brokerage firms probably won’t even talk to you and a privately sponsored IPO, which is an option, is really not for the faint of heart. heart.
Do you know your “why”?
A company needs a reason to go public, to invest in future growth. If you are currently cash rich and have no intention of explosive growth that requires more capital, there is very little benefit to the owners or future shareholders. Plus, unlike the heady days of dot-com-ville, you have to justify the cash infusion; Don’t expect anyone to take a kindly look at your corporate gyms and fancy desks!
Are you comfortable with “sharing” – earnings and information?
In exchange for the infusion of cash that is generated from an IPO, you agree to give up a portion of your proceeds that are returned to investors. Essentially you are sharing the rewards with your partners as they come in and take some of the risk for you.
Some companies are reluctant to go public due to the loss of confidentiality of the company’s operations, policies and profitability. This is especially important for companies that rely on proprietary technology to create their goods or services.
Do you have a good business plan?
Part of the IPO process is completing the disclosure document, which is very important in convincing investors of the viability of your IPO. Without a well-defined business plan, you may find it difficult to fully answer the questions in the disclosure document, and investors may find your offer less attractive. The business plan you will need can range from 25 to hundreds of pages and can cost between $5,000 and $20,000 to produce.
How much more reporting are you willing to do?
Public companies are often put under the microscope by investors, customers, competitors, regulators, etc. There’s also a tremendous push these days for more transparency with finances. The public market demands not only the numbers, but also how those numbers are obtained. As a director of a public company, you will be required to file reports with the SEC, any exchange on which it is listed, and comply with any applicable state securities laws. All of these reports cost money to produce and also provide information to your competitors.
Are you a lone wolf?
If you are successful with your IPO offer, someone else will own a piece of your business, and they may want a say in how things are run. You will be subject to their ideas, opinions and demands on how you should run your company. If you’re not willing to share control with your new partners, or if you don’t trust their decisions, this loss of control is the deal breaker for you. And if your business relies heavily on the skills of one or more key personnel, be aware that going public can place enormous constraints on these individuals.
Got an extra million laying around?
An IPO costs money! A typical company can easily spend $750,000 in direct expenses related to an IPO. And that’s not even considering the indirect costs of admin time spent on the IPO, business interruption while the IPO is being prepared, etc. You’ll also need a good outside team: IPO consultants, accountants, lawyers, underwriters, and PR specialists, none of whom work for free, of course!
What if you don’t have free time to start?
Most people are surprised at the amount of time it takes (outside of your normal business operations) to prepare your offer. During this time-consuming process, your role in managing the business may be affected. You will meet and give presentations to potential investors. And the toll on your personal life can be significant: Preparing to go public will consume your time with family and friends. Yes, it’s only short-term, but it can last up to a year, and you should be prepared for long, sometimes exhausting days of 13-15 hours.
Is your management style conducive to guiding employees through change?
Many business owners report that the process of going public changes the internal dynamics of a company. It is important to keep the lines of communication open between your staff during this time. Once it’s made public, don’t let staff feel they have to worry about daily fluctuations in stock prices distracting them from their jobs. And sometimes employee benefit programs are changed after an IPO, which can also make employees nervous.
If your current management style is very strict, typically only sharing information on a strict “need to know” basis, the productivity of your post-IPO employees can be severely affected. A more open management style is more conducive to successful post-IPO operations.
[A special thanks to these experts who helped me compile this list: Willie Crawford, Andy Beard, Dien Rice, Ankesh Kothari, Richard Dennis, Stephan Iscoe, Jeff Burnham, Members of The Seeds of Wisdom Business Forum, and The Willie Crawford Forum. M.M.]