Taking a Company Public

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Why Go Public? Reasons to go public on the NASDAQ, NYSE or OTC

Many investors will never invest in a private company, because their stock is not liquid. Once they buy in, they’re somewhat “stuck” with the stock, unless / until there is a major event like the sale of the company. However, if your company is publicly traded, even on a smaller board such as the OTCBB or Pink Sheets, their investment is liquid. This liquidity reduces their risk. This usually makes it easier for you to raise money.

Going Public is a Wealth-Building Strategy for You

  • A public company has direct access to the capital markets and can raise more capital by issuing additional stock in a secondary offering. Public companies can also more easily raise funds privately. The more money your company can attract, the higher its valuation. The higher its valuation, the more your personal net worth is as a large shareholder of the company. For example, if the company raises $1mm and the book value doubles, the value of the assets underlying your stock doubles.
  • Public companies can use their stock to attract and retain good employees. Good employees in turn create more efficient and effective operations. Better operations translate into higher earnings which translate into higher share prices. Higher earnings attract investors because they lower the P/E ratio. Investors enter the market and buy your stock which makes the price go up. The price will go up, as a basic fundamental Supply/demand function of economics until a new point of equilibrium is reached. A higher stock price means a higher net worth for you.
  • Being a public company is more prestigious than being a private company. Let not this prestige be overlooked. Often because of transparency, many lenders, vendors and suppliers will be more apt to do business with the company because of the increased credibility. And being the CEO of a public company vaults you into an elite class of executives as the number of public companies are only a small fraction of the plethora of private companies.
  • Going public provides owners and founders an exit for selling their ownership holdings in the business. It’s referred to as the “ultimate exit strategy” because it provides the business owner with a paced and controlled exit, meaning it’s over time which can allow you to manage the process, extracting higher value as you go.
  • Public companies are generally worth more than private companies. The public companies that compose the Standard & Poor’s 500 are valued at about 17 times their earnings (i.e ., a company earning $1 million would be worth $17 million ), while private companies are typically bought and sold at one to five times cash flow. Higher valuation means more money in your pocket.

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Access to Capital

A public offering of stock can vary from $500,000 to over $1 billion. In 1999, 544 companies completed an IPO(Initial Public Offering). The total capital raised from these offerings was $23.6 billion. By offering stock for sale to the public a company can access a substantial source of corporate funding.

If a company needs to raise capital, it can sell stock(equity) or it can it issue bonds(debt securities). An initial equity offering can bring immediate proceeds to a company. These funds may be used for a variety of purposes including; growth and expansion, retiring existing debt, corporate marketing and development, acquisition capital and corporate diversity.

Once public, a company’s financing alternatives are increased. A publicly traded company can return to the public markets for additional capital via a bond or convertible bond issue or secondary equity offering. A public status can also provide favorable terms for alternative financing from public and private investors.

In general, public companies have a higher valuation than private enterprises.

Liquidity

To sell the stock of a private company, a stockholder must find another individual that is interested in owning the shares. This is very difficult, especially for minority positions.

By going public, a company creates a market for its stock in which buyers and sellers participate. In general, stock in a public company is much more liquid than stock in a private enterprise. Liquidity is created for the investors, institutions, founders, owners and venture capital professionals. Investors of the company may be able to buy or sell the stock more readily upon completion of the public offering.

This liquidity can elevate the value of the corporation. The stock’s liquidity is contingent on a variety of factors including, registration rights, lock-up restrictions and holding periods. A public company has greater opportunity to sell shares of stock to investors. Ownership of stock in a public company may help the company’s principles to eliminate personal guarantees.

Liquidity can also provide an investor or company owner an exit strategy, portfolio diversity, and flexibility of asset allocation.

Compensation

Many companies use stock and stock option plans to attract and retain talented employees. It is increasingly common to recruit and compensate executives with a combination of salary and stock. Stock in a public company can be issued as a performance based reward or incentive.

This reward is more desirable if the stock has a public market. Stock can be instrumental in attracting and keeping key personnel. Also, certain tax advantages are a consideration when issuing stock to an employee. Generally, capital gains taxes are lower than ordinary income taxes. Owners and employees may have specific restrictions relating to the liquidity and sale of the stock.

A public offering can create a market for the company’s stock. This market can result in liquidity and reward for the company’s employees. A stock plan for employees demonstrates corporate good will allows employees to become partial owners in the company where they work.

An allocation of ownership or division of equity can lead to increased productivity, morale and loyalty. This type of compensation is a way of connecting an employee’s financial future to the company’s success.

Prestige

A public offering of stock can help a company gain prestige by creating a perception of stability. A company’s founders, co-founders and managers gain an enormous amount of personal prestige from being associated with a client that goes public. Prestige can be very helpful in recruiting key employees and marketing products and services.

When sharing ownership with the public, you spread the company’s reputation and increase its business opportunities. By selling stock on an exchange your company can gain additional exposure and become better known. This exposure may lead to improved recognition and business operations.

The public status can be leveraged when marketing goods and services. Often a company’s suppliers and consumers become shareholders, which may encourage continued or increased business. In this example, a public company could have a competitive advantage over a private enterprise. An IPO can indicate credibility to a company’s customers, which may lead to increased sales and a greater corporate profile.

Once public, lenders and suppliers may perceive the company as a safer credit risk, enhancing the opportunities for favorable financing terms. Also, a public offering can create publicity that is effective when marketing your company.

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Public firms tend to have higher profiles than private firms. This is important in industries where success requires customers and suppliers to make long-term commitments.

For example, software requires a significant investment in training and no manager wants to buy software from a firm that may not be around for future upgrades, improvements, bug fixes, etc. Indeed, the suppliers’ and customers’ perception of company success is often a self-fulfilling prophecy.

Publicity

A public offering of stock can generate prestige, publicity and visibility, which is effective when marketing your company. Public companies are more likely to receive the attention of major newspapers, magazines and periodicals than a private enterprise.

A strong ad campaign coupled with media initiatives can potentially increase sales and revenue. The publicity received from a public offering encourages new business development and strategic alliances. Analyst reports and daily stock market tables contribute to the awareness of the consumer and financial community.

A successful public offering can get your company’s story out to the world and open an opportunity for investors that are not suited for an investment in a private company. The publicity that a public offering brings can attract the attention of potential partners or merger candidates.

Because the financial condition of a public company is subject to the scrutiny of the SEC reporting requirements, existing or future business relationships are strengthened.

Mergers & Acquisitions

Once a company is public and the market for its stock is established, the stock can be considered as valuable as cash when acquiring other businesses. A successful IPO can have a dramatic effect on a company’s profile, perceived competitiveness and stability. This perception can lead to expanded business relationships and added confidence in the consumer.

A valuation of a private company often reflects illiquidity. A successful public offering will increase a company’s valuation leading to a variety of opportunities for mergers and acquisitions. With the ability to raise additional capital by returning to the public markets for another offering, a public company is better able to finance a cash acquisition.

A public company also has the advantage of using the market’s valuation when exchanging stock in an acquisition. SEC disclosure requirements offer merger candidates the assurance of shareholder scrutiny and accurate reporting of the financial condition or solvency of the public company. Using stock to acquire another company can be easier and less expensive than other methods.

Additionally, Many private firms do not appear on the radar screen of potential acquirers. Being public makes it easier for other companies to notice and evaluate the firm for potential synergies.

Exit Strategy

One of the important benefits of a public offering is the fact that the company’s stock eventually becomes liquid, offering reward and financial freedom for the founders and employees.

A public market for the stock also provides a potential exit strategy and liquidity to the investors. A psychological sense of financial success can be an added benefit of going public. A public offering can enhance the personal net worth of a company’s shareholders.

Even if a public company’s shareholders do not realize immediate profits, publicly-traded stock can be used as collateral to secure loans.

Future Capital

Growing companies constantly need access to new capital. Going public is one way to obtain that capital, but it takes time and money — quite a lot of both! Going public offers some strategic advantages:

Almost all companies go public primarily because they need money. All other reasons are of secondary importance. The typical (firm-commitment) IPO raises $20-40M, but offerings of $100M are not unusual. This can vary widely by industry.

Once public, firms can easily go back to the public markets to raise more cash. Typically, about a third of all IPO issuers return to the public market within 5 years to issue a “seasoned equity offering” (the term secondary is used to denote shares sold by insiders rather than by firms). Those that do return raise about three times as much capital in their seasoned equity offerings as they raised in their IPO.

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