Cash Flow From Operating Activities Cash Flow From Investing Activities Going Public – Is it The Best Option For You?

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Going Public – Is it The Best Option For You?

Do you know what an IPO is? An initial public offering (IPO) is essentially 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 IPO involves the shares of a young and not very well-known company. The most compelling reason to go public is to raise money for working capital. However, strings are attached…

After the dotcom bust, the Enron, WorldCom, Tyco and Global Crossing scandals, the landscape for IPOs changed. Going public is no longer an automatic decision – even for companies that are good candidates. Oh, there are many reasons to go public – access to capital, increased liquidity, employee benefits, publicity and prestige. But before you jump on the “public” bandwagon, make sure you consider the following points.

Do you have a golden parachute handy?

Anytime you take a cash partner, you risk losing control of your company and possibly even the company. Jim Clark, before he hit it big with Netscape, was essentially pushed out of his first company, Silicon Graphics, by the venture capitalists he initially partnered with to start it.

Some entrepreneurs are angry about the limitations of a public company. Richard Branson of Virgin is a good example. After taking his company public, Branson realized that he really didn’t like sharing profits and working with outside directors of the company. Branson and his management team eventually conducted a management buyout to take the company back private.

Research all available anti-takeover measures and include them in your IPO if possible. Remember, however, that investors will not be willing to pay top dollar for a company where management can never be replaced.

Sexy enough?

Your company must have an “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 isn’t for you because brokerages probably won’t even talk to you, and a privately sponsored IPO – which is an option – is definitely not for the faint of heart.

Do you know your “why”?

A company needs a reason to go public, to invest in future growth. If it is currently cash-rich and has no intention of explosive growth that requires more capital, there is very little benefit to owners or future shareholders. Also, unlike the heady days of dot-com-ville, you have to justify an infusion of cash; don’t expect anyone to favor corporate fitness centers and fancy desks!

Are you happy with “sharing” – profit and information?

In exchange for the cash flow generated by the IPO, you agree to give up a portion of your profits that are returned to investors. You basically share the rewards with your partners as they step in and take some of the risks for you.

Some companies resist going public because of the loss of business confidentiality, policies and company profitability. This is especially important for companies that depend on proprietary technology to create goods or services.

Do you have a good business plan?

Part of the IPO process is completing a disclosure document, which is very important in convincing investors of the merits of your IPO. Without a well-defined business plan, you may find it difficult to fully answer disclosure questions, and investors may find your offering less attractive. The business plan you need can be anywhere from 25 to several hundred pages and cost anywhere from $5,000 to $20,000 to produce.

How much more reporting are you willing to do?

Public companies are often scrutinized by investors, customers, competitors, regulators, etc. These days there is also an extraordinary effort to make finances more transparent. The public market requires not only the numbers, but also how those numbers are derived. As a manager of a public company, you will be required to file reports with the SEC, any stock exchange on which you are listed, and comply with all applicable state securities laws. All these reports cost money to produce and also provide information to your competitors.

Are you a lone wolf?

If you’re successful with your IPO, someone else will own a stake in your company—and may want to be involved in how things go. You will consider their ideas, opinions and requests about how you should run your business. If you’re not ready to share control with your new partners, or if you don’t trust their decisions, this loss of control is a turning point for you. And if your business is heavily dependent on the skills of one or more key employees, be aware that going public can place significant limitations on those people.

Got an extra million lying around?

IPO costs! A typical company can easily spend $750K on direct costs associated with an IPO. And that doesn’t even take into account the indirect costs of management time spent on the IPO, business disruptions during IPO preparation, 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!

But what if you don’t have free time to start?

Most people are surprised by the amount of time it takes – outside of your normal business – to prepare your offer. Your role in actually running the business can suffer in this time-intensive process. You will meet and make presentations to potential investors. And the toll on your personal life can be significant – preparing to go public will eat up time for family and friends. Yes, it’s only short-term, but it can last up to a year, and you have to be prepared for long, sometimes grueling, 13- to 15-hour days.

Does your leadership style guide employees through change?

Many business owners report that the process of going public changes the internal dynamics of the company. It is important to maintain open lines of communication between your staff during this time. When you go public, don’t let your staff think they have to worry about the day-to-day swings in stock prices distracting them from their work. And sometimes employee benefit programs change after an IPO, which can also make employees nervous.

If your current management style is very similar and you tend to share information only on a strict “need to know” basis, your employees’ productivity may suffer severely after an IPO. A more open management style is more favorable for a successful post-IPO business.

[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.]

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