It’s a question that many growth companies
find themselves debating again and again:
Should we take the company public?
Since 2002, additional layers of compliance and expenses are leading many companies to stay private and some public
companies to head back to the relatively
safer, slower-paced and more economical
waters of private ownership.
“Sarbanes-Oxley compliance and the
increased capital available in the private
sector have presented critical factors for
today’s companies to consider, relative to
either going public or going private,” says
Darrel C. Smith, managing partner for
Shumaker, Loop & Kendrick LLP’s Tampa
office. “The difference between a being a
profitable company and a nonprofitable
company could come down to the significant costs associated with and continuing
as a public entity.”
Smart Business spoke with Smith about
the risks and benefits of taking a company
public, and what factors are driving some
companies back to private ownership.
Why should a company consider going public
or staying public?
The No. 1 reason for going public is that
it can be a good source for less expensive
capital to quickly grow a company. Additionally, it can create greater visibility
and enhanced corporate reputation.
Owners, investors and employees can
benefit by owning shares with a ready public market to liquidate them. Finally, it’s
easier for a public company to establish its
valuation.
What benchmarks indicate it may be time to
go public?
IPOs offer a unique ability to obtain significant capital at a lower cost with fewer
restrictions compared to traditional loans
and private equity, but only if the company
has a solid track record of profitability and
high gross margins within a healthy market
sector. Additionally, the company should
have significant growth opportunities
available to it, strong management and
infrastructure, and a need for substantial
funding to grow the business.
It’s critical to understand that going public doesn’t suddenly add value to a company. It can actually reduce the company’s
value because of the increased expenses.
A number of factors may indicate that it’s
too early to take a company public.
Obviously, if your company does not meet
the criteria to list shares for trading on
NASDAQ, NYSE or AMEX, or if the offering will result in too few public shares —
or, in other words, not enough public float
— it’s probably too early to consider going
public. A lack of public float can lead to an
illiquid market and difficulties attracting
necessary institutional analyst coverage
and active market-makers necessary to
create a market for your shares.
What are the obvious and hidden costs of
going public?
The obvious monetary costs are substantially increased organizational costs, and
audit and legal fees. Some other obvious
costs include printing fees, increased directors and officers insurance premiums, and
SEC and exchange fees.
Hidden costs include ongoing professional fees and the continuing costs of being
public and ensuring compliance. These
costs run well more than $1 million a year,
regardless of the size of the company.
There are also substantial hidden costs for
in-house GAAP (generally accepted accounting principles) expertise and public
and investor relations. It should also be
noted that nuisance lawsuits often increase
for publicly traded companies because
folks believe there is a deep pocket.
A nonmonetary cost is the diversion of
management’s attention to going public
and dealing with compliance matters. This
can create an opportunity cost because it
takes them away from running and growing the business.
What is leading some public companies back
to private status?
Some are smaller companies seeking to
get out from under the cost of SOX
(Sarbanes-Oxley) compliance. Others are
being lured by the ready availability of private equity and loans at rates that can be
competitive to public financing and opportunity to get out of the quarter-to-quarter
pressure of being a public company.
Some are seeking the increased flexibility and reassumption of control in running a
private business, as well as the ability to
grow the business for the long haul instead
of managing just to meet short-term market expectations.
What key drivers should be considered
before going public?
First, do you have a strong balance sheet
and financial history? Second, will you be
able to attract one or more reputable investment banking firms to underwrite a public
offering, offer coverage of your company
and provide market-making support? Third,
do you have high-growth potential with a
need for significant capital?
A thorough legal review of the regulatory
steps and considerable financial obligations
related to going public may help decide the
ongoing debate about taking your company
public. An experienced securities law attorney can help guide a company through the
evaluation of whether going public or private is the right move.
DARRELL C. SMITH is managing partner of Shumaker, Loop &
Kendrick LLP’s Tampa office. Reach him at (813) 227-2226 or
[email protected].