Deciding whether or not to go public is one of the most important decisions an executive can make. Given the enduring bull market of the last couple of years, it may surprise those who have yet to be faced with this decision that it is also one of the most difficult. One thing that many executives fail to understand is that going public is not an end in itself, but merely the start of a whole new life cycle for a company one that is fraught with equal measures of opportunity and risk.
In order to make an informed decision about whether or not to transform your company from a privately held business to a publicly owned enterprise, you should first understand both the advantages and the disadvantages of going public.
The pros: money, money, money
Not surprisingly, most of the advantages of going public revolve around money. A company with a hot business story or technology can raise a significant amount of capital with an initial public offering (IPO) often much more than could be raised from private equity investors or through borrowing.
A public company can use its stock as currency in mergers and acquisitions, and stock options can be a key component of incentive compensation plans for management, directors, and employees. Public offerings can sharply increase the net worth of founders, executives, and principals, providing an exit strategy for those who want to pursue other activities and for any venture capital firms that invested in the company.
Going public is not only an effective means of raising capital, it also can help you to raise more capital. As your company continues to grow, it likely will need additional financing in the future. If your stock performs well in the stock market, you may be able to sell additional stock on favorable terms. And simply being a public company has a certain cachet in and of itself, projecting an image of substance and strength.
The cons: disclosure, demands, dilution
There is, however, a flip side. As a publicly held corporation, your company’s operations and financial situation are open to public scrutiny. Information about your company including sales, profits, and the salaries and perquisites of officers and directors must be made available to competitors, customers, employees, the media, analysts, and others, not only at the time of going public but also regularly on a continuing basis. Founders and executives accustomed to keeping such information close to the vest can find this level of disclosure uncomfortable and disconcerting.
Going public affects how you run the company. You will have to devote a significant amount of time addressing the needs of a number of new constituents, including shareholders, brokers, securities analysts, and the press, all of whom want up-to-date information about the company’s progress. And because the Securities and Exchange Commission (SEC) requires quarterly disclosures of financial results, your planning and operating horizons will become shortened; coupled with having to meet short-term earnings expectations, a public company can find it challenging to undertake new strategic initiatives that may not be profitable for a number of quarters.
Also, by selling shares your control of the company naturally becomes diluted. You may even be threatened with outright loss of control. Indeed, a founding executive who has long felt that he or she owned the company will find after going public that he or she is now working for a large number of mostly unseen and unknown owners whose combined stake in the company may exceed that of the founder.
Finally, there is a disadvantage to going public that involves money: the cost of going public, both initially and on an ongoing basis, is quite substantial. From underwriters’ commissions to expenses associated with periodic public reporting, public companies face numerous costs that private companies do not.
Going forward, privately or
publicly
If you choose not to go public, there are alternate means of obtaining financing, like loans, venture capital, and selling your business. Or, you may simply want to postpone going public until either market conditions improve or you feel you are ready to take on the additional costs and responsibilities. The question of whether or not to go public can be raised repeatedly during a company’s lifetime.
If or when you decide to go forward with an IPO, be mindful of the fact that the money you raise comes from the pockets of the shareholders, who will only support the company if it remains profitable for them to do so. Your primary focus must be on maintaining and increasing shareholder value. You will find that in doing so, you will also grow. Which is probably why you’re considering going public in the first place.
