Many successful businessmen ask “what factors should I consider in taking my company public?” Some companies benefit greatly from being publicly traded while others, after the proceeds of a public offering are gratefully received, languish in obscurity never able to tap the markets again for needed capital and burdened by the disclosure and other requirements of being a public company.
A big factor for management to consider is what the markets value and therefore reward. The simple answer is growth; but almost as important is consistent, predictable growth, not episodic, uncontrollable growth followed by long periods of flat results or digestion of prior transactions. Growth funded only by diluting equity is also not favored.
In order to meet the market’s expectations, companies must organize themselves for consistent growth. Clearly, a family-owned company satisfied with its market position and maintaining a level of cash flow necessary to keep family members happy, is not a prime candidate for an IPO. A private company seeking to go public should be imbued with an entrepreneurial spirit that has identified growth opportunities for its business but lacks only the capital to realize its dreams.
Management should be prepared to take significant risks and devote tremendous energy to realize a growth-oriented business plan. Putting together such a business plan is an essential element of the public offering process. It requires not only an understanding of the company’s market opportunities but a “bottoms-up” analysis of what it takes to organize the company to meet the challenges of creating profitable growth. In addition, a corporate culture must be fostered that makes realization of the business plan an attainable goal. Everyone is the organization must understand how they can contribute to the realization of the company’s goals.
It certainly helps if macro-economic trends support the company’s growth plan. For example, those companies that can establish themselves as low cost producers able to penetrate foreign markets are likely to find favor in the public capital markets, especially if growth in the U.S. economy is stagnant.
The categories of companies which the market has been interested in taking public is as follows:
Companies with a history of successful operations with a demonstrated growth trend that is likely to continue;
Companies that possess a unique franchise or market niche within a market sector that is experiencing growth and management has a comprehensive business plan to realize profitable growth.
Companies that possess patent or similar rights to a technology in a market sector which could experience rapid growth by the application of new technologies.
Companies in a market sector that is experiencing growth headed by an entrepreneur or management team with a successful track record with prior IPO’s.
Only in the first instance is a demonstrated history of profitable growth a prerequisite. It is primarily future profitability that the markets focus upon.
Management must realize that there are alternatives to raising capital through an IPO and often these alternatives should be explored first in order to better position the company for a successful IPO. These can be summarized as follows:
Raising funds from a venture capital firm;
Raising funds privately from a group of sophisticated/wealthy investors in an exempt offering;
Bank or similar private debt financing; or
A joint venture with an established company able to provide capital and perhaps other skills, such as the expertise to meet regulatory requirements.
In going public, the company realizes several objectives:
Receipt of capital to fund business objectives;
Liquidity, or at least potential liquidity, for company insiders;
Creation of a new form of currency to reward loyal employees or to make acquisitions;
Obtaining a source of future capital to fund growth; and
Creation of a basis for valuation of insiders’ stock for estate tax or similar purposes, and facilitation of business succession strategies.
Going public is not for every growing business. First and foremost, being public creates a new list of requirements that must be met by the company. Although the burdens of meeting these obligations fall mostly on the chief executive and chief financial officer, to some extent, they affect everyone. The process of going public is expensive and time-consuming. Management must be educated as to the needs of the market place and the market place must be educated by management as to the opportunities for the company. There is always the risk of a failed or delayed offering and the negative impact that may have on employees, customers and others who do business with the company.
The above is intended to provide general information, not specific legal advice or a recommendation. Legal advice can only be rendered to clients who have a retainer relationship with the law firm. To ensure compliance with requirements imposed by the IRS under Circular 230, we inform you that any U.S. federal tax advice contained in this communication (including any attachments), unless otherwise specifically stated, was not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any matters addressed herein