Questions to Ask Before Considering Taking Your Private Company Public
Ask yourself these to make sure you're ready before going public with your company.
The decision to go public should never be treated flippantly. It’s a path of serious import whose consequences must be carefully weighed. We’ve worked with private businesses with billions in annual revenue and public companies that were once as big, but which are not defunct giants of a bygone era. The shells of yesteryear are often neatly recycled into the successful public firms of tomorrow. But being public doesn’t make the company. It’s easy to get caught up in the sexiness of having some shares in public float. Determining whether it’s right for your business is typically weighed on a case-by-case basis. As you weigh pros and cons of going public, here are a few questions you’ll want to consider.
How frequently do you need to raise capital?
Some companies need a big hunk of capital for a single one-time event like buying a building or leasing equipment. Others require regular capital infusions to fuel growth. In some cases inorganic growth (like in the case of mergers and acquisitions) is better facilitated by using stock as a bartering chip. For most companies not in hockey stick growth, large chunks of capital need to be raised fairly infrequently. That’s what business loans are for. Unless organic growth demands higher-than-normal working capital needs or growth by M&A requires a combination of stock and cash for doing deals, most companies don’t need the increased regulatory burdens of being publicly-traded.
Will you be able to cover the legal and accounting cost?
The on-going regulatory burden of owning and managing a public company can be onerous. In fact, it’s one of the main reasons many public firms go private and private firms forego the option to take a company public. Regular reporting with the SEC for public companies is a five and–most often–a six-figure annual burden, especially if you’re on one of the higher exchanges like the NASDAQ or NYSE. Is the increase in funds raised from your public float worth the financial burden.
Will you be able to stand the heat?
Not only will your company need to bear the increased regulatory burden of being public, they’ll also be greater exposed to analysts, litigation and macro shocks that send the stock price across the map. Increased public criticism and exposure is not for everyone. It’s likely your current financial statements reside safely on some Quickbooks server. Once your public the good, the bad and the ugly can be accessed with the click of a button via the SEC website. Is your firm ready to have its dirty laundry exposed for the world to see?
Are you ready for investor relations?
Private companies are often beholden to investors and a board, but public companies hold an increased burden for maintaining details and updating investors on the frequent changes of the business. A good SEC attorney and investment banker can help navigate the waters of what is required to be reported and when, but the requirements are many and the rules change regularly. The increased burden is often placed on the shoulders of management who should be spending more time operating the business rather than fielding information requests. Even worse are the public company Investor Relations firms. From my personal perspective, Investor Relations is filled with unscrupulous characters who overcharge for their services. In most cases, with the right internal staff, IR can be fairly simple to cover internally, but it still needs covered.
How do you want to go public?
There are many roads that lead to Rome. How you get there depends on several factors including your corporate growth strategy, your existing market position and of course the size of your company. The disparity in costs between the various options for going public are astounding and most private companies lack the expertise to navigate the going public waters. Retaining the assistance of competent professionals to discuss the options relative to your strategy may be your best option for weighing the best go to “public” market strategy.