Many businesspeople have thought about the thrill of going public: the challenge, the excitement, the bragging rights and the “pot of gold” at the end of the rainbow.
But what should you know about the downside and cost of such a venture? Are there important things you absolutely must be aware of before you take the plunge? This column will address the major concerns that must be resolved before you make a final decision.
For example, the first thing you should consider is who you are. This might seem like a strange question to ask because the IPO process is technical from both a legal and an accounting standpoint and doesn’t, at first blush, seem to lend itself to a “touchy-feely” type of analysis.
There is, however, a large personal element that must be dealt with before you really delve into the nuts and bolts of going public. Let’s take a look at this element.
Consider Your Personality
Some people are extremely private and want no one to know their business. But if you bring your company public, everyone will know your business. Yes, your annual salary, perks, potential conflicts of interest and details about the board of directors that you have chosen are all available to the general public — even to your neighbors, if they are so inclined to inquire.
This factor is a turnoff for many businesspeople. It should be one of the first things for you to consider before you proceed.
If you like to do things your way without having to worry about what anyone will think or do, an IPO for your company might not be the right decision. For example, if your spouse is on the payroll but doesn’t contribute much value, he or she will have to get off the payroll if you bring your company public.
Also, a public company should have an auditing committee that will (or should) look deeply into how you are running and managing your business. Some entrepreneurs will not tolerate such close scrutiny. Therefore, you must come to terms with some loss of both authority and autonomy if you go public. Obviously, many successful small businesses that have gone public have overcome this hurdle. But for some of you, it might be insurmountable.
Is Staff Ready?
Does your company have a solid infrastructure of qualified personnel? Specifically, does your company have the personnel who can handle the application process as well as the reporting and regulatory requirements of a publicly held company? Surprisingly, there are many very profitable small businesses that are still run with “seat-of-the-pants” management.
Many don’t even have an in-house bookkeeper, let alone a chief financial officer (CFO). They rely on their CPA to prepare annual tax returns and annual unaudited financial statements. That means that they are not getting the financial information that they need on a current basis in order to wisely and prudently run their company. Yet many of these businesses prosper.
The company that decides to go public must have key personnel in place in order to successfully execute an IPO and thrive as a publicly held company. An in-house accountant (CFO) is an indispensable member of your IPO team.
Other members should include a reputable, independent accounting firm that is experienced in auditing publicly held companies, and a competent securities attorney who knows the ropes and can deal with the regulatory requirements that involve filing for an IPO and dealing with regulatory obligations when your company’s stock is publicly traded.
These personnel requirements are not onerous. But if you’re used to thinking small and will not avail yourself of the necessary talent needed to maintain a company in the public markets, then an IPO is not for you.
What Will It Cost?
How much will an IPO cost my company? There are some unavoidable expenses that will be incurred in the IPO process. These expenses primarily involve the costs of extra legal and accounting services that inevitably arise in the process. Let’s take a closer look at these.
As mentioned above, you must have an in-house CFO. This means that, depending on the size of your business, you will be spending at a very minimum an additional US$100,000 for this position. It must be said, however, that there are many entrepreneurial-type CFOs who will take a reduced salary so long as they are given stock or stock options. This might help your cash flow until your company can afford to pay the full price for a CFO.
You also must hire an independent auditor who has experience with auditing publicly held companies. A certified audit that produces so-called audited financial statements is costly. Depending on the size of your business, the cost of an annual audit will probably start at a low of about $40,000 and then increase according to the size and complexity of the audit.
You will have to find an experienced securities attorney. The cost of such an attorney for an IPO filing starts at about $50,000 and goes up from there. I have known some attorneys who will take stock as payment for their services. This, of course, will reduce the costs accordingly.
Underwritten or Not?
Another decision is to whether to proceed with an underwritten or non-underwritten IPO.
The total cost of a fully underwritten IPO — including attorneys and accountants — will start at a minimum of $300,000 and go up from there, not counting the stock that you have to give up to the underwriter.
A non-underwritten IPO is usually substantially less expensive and results in your having to give up much less of your company’s stock for the privilege of going public. See my previous column that explains this process in detail.
Because underwritten IPOs are very difficult to achieve in today’s stock market environment, examine the non-underwritten route described in that column before you make the final decision of bringing your company public.
You also should consider what follow-up compliance will be needed.
After your firm is public, your in-house accountant, outside auditor and securities attorney will be aiding you in complying with the regulatory requirements on an ongoing basis. This follow-up compliance is not necessarily onerous, but it is something that will go on indefinitely. In other words, it will not go away. Therefore, it’s an important element to consider before you make the final leap to a public offering.
In summary, bringing your company public is a very special achievement. Not only does it potentially greatly multiply the value of your company compared to what it would be worth if you remained private, but it also gives you all of the other wonderful perks of being public: liquidity for your stock; ability to use your stock to acquire other companies; liquidity for your estate in that your stock is not only easily valued, but can be more easily sold than stock in a private company; and ability to raise needed capital far easier than if you stayed a private company.
There are many upsides to being a public company. But you must realize that there can be downsides. Looking thoroughly at the entire picture can only enhance your chances of success. Good Luck!
Theodore F. di Stefano is a managing partner at Capital Source Partners and can be contacted at [email protected].