Tip of the Week: Are You Sure You Should Go Public?

There are five major advantages to going public. The desire to benefit from some or all of these should be the reason you want to make the move from private to public. Take a look at the following list and see if these advantages will improve your company’s long term prospects; however, don’t forget to compare these to the disadvantages of being a publicly traded company.
Advantages:

1. Access to Capital

It is easier to raise money when you are a public company. Two reasons for this are the disclosure of financial information and ease of creating liquidity for investors. With all this said, going public solely to obtain one round of financing can lead to trouble.

2. Liquidity

Liquidity provides investors the opportunity to move toward an exit by being able to turn their investments into cash. Investors aren’t the only ones looking for an exit strategy—one of the main reasons for bringing a private company public is so the company founders, former investors and senior executives holding stock positions can take money out of the business without selling it outright or losing practical control. The challenge in this new found liquidity is to avoid a big rush of share sales by company insiders. Tip to senior executives—Don’t get greedy!

3. Growth through Acquisitions or Strategic Partnerships

Another popular reason for going public is to pursue a strategy of growth through acquisitions, joint venture, or strategic partnership. A public company can often use stock as currency in the package of consideration that is provided to the company being acquired or partnered with. This allows a company to retain its cash for other purposes.

4. Stock Options for Executives

Attracting talented senior management is not easy. Public companies can use stock options and other equity incentives as part of a compensation package to draw in talented executives. Options attract those who lead public companies because they align management’s incentives with company performance as judged by the market.

5. Confidence in Management

Public companies require a lot of information to be filed with the SEC. This information helps shareholders feel knowledgeable about the company’s operations and challenges. With this said, one must remember that even public company filings can be misleading or fraudulent—so be careful.

Disadvantages

1. Emphasis on Short-Term Results

A public company must concentrate on making wise decisions and how those decisions will be perceived by analysts. The management must keep its eye on stated goals as short-term results become more important than the long-term goals every company must pursue to build shareholder value.

2. Public Disclosure

All of a company’s problems have to be revealed, including the loss of a major customer, strong personal and/or family ties an executive has to a vendor, or if financial statements are being restated. Also, disclosure requirements make it more difficult to keep important information away from competitors. Tip—Be consistent and as quick and determined to disclose the bad information as well as the good.

3. Fraud & Greed

Fraud and greed are a part of corporate America, and in some respects public companies have more incentive to engage in questionable practices. This stems from the enormous amount of pressure put on executives to meet or exceed Wall Street’s expectations of their performance.

4. It’s Expensive

Companies going public need to prepare for significant additional costs because for some companies, these costs are the difference between positive and negative net income.

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