Going Public

To many business owners, an initial public offering represents a financial milestone:  It is public recognition of their corporate success. It also can be highly profitable. However, the public sale of securities is an expensive process that can subject the company and its owners to liabilities well in excess of the amounts of securities sold, particularly if the sale is poorly planned and supervised. In some cases, it also can add pressures and costs without contributing to the success of a business or its owners.

Advantages

Obtaining financing—Going public often leaves the company in better financial condition, because the infusion of cash or refinancing of private debt with public funds provides liquidity that allows the company to do something specific: expand its operations, buy new equipment or provide additional working capital. Going public provides an economical means for acquiring other businesses, as well as the ability to leverage the prestige of being public into finding new financing sources, acquiring new customers and negotiating better terms with vendors.

Providing owner benefits—Going public provides an active market for sale of company shares and allows owners to sell some of their shares to the public to make a profit, shift part of their ownership risk and retain their management positions. Of course, going public involves significant income tax considerations and a certain level of lost control over the company’s activities. Having public shares also provides a greater number of options for management and employee compensation, which can provide a better means of attracting management talent.

Disadvantages

Shifting role of management—Management must report to a board of directors that owes its allegiance to stockholders. While management often retains the ability to make day-to-day decisions, they must often seek board or shareholder approval for significant strategic decisions. In addition, securities laws require public disclosure of certain information, including sales of company shares by upper management. Upper management also has significant personal liability for the financial and operating activities and reporting of the company. Once a company goes public, it also becomes a potential target for acquisition or change of control.

Does Going Public Make Sense for Your Company?

There is no single answer to this question, but here are some questions you need to ask to arrive at the answer:

• What would the company do with the proceeds?
• Is the management team strong enough to handle a public company?
• Does the company expect growth in the next few years?
• Is the company large enough to afford a public offering?
• Is the company’s positioning and timing right for a public offering?
• Does the company have time to wait for going public?
• What are the logistics of taking a company public?
• Would conventional financing arrangements or a private securities offering make more sense?

If You Want to Explore Going Public…

We at BKD can help you answer the needed questions and develop a plan that meets your objectives. This process includes:

• Developing and compiling a business plan
• Analyzing the potential price-earnings multiples available from public markets for your company
• Compiling a timetable for going public
• Analyzing the relative costs of going public compared to other forms of financing your business
• Helping you understand the roles and responsibilities of public company management
• Assisting in locating underwriters for an offering