CHAPTER NINE: Part C – Is taking your company public a good move? This is the question most entrepreneurs of rapidly growing businesses ask. Well, this article will try to answer in detail.
Taking a company public is not child’s play, as the process and financial costs involved can overwhelm both the business and the entrepreneur or management team. Usually, entrepreneurs start to think of taking their business public when the funding required to meet the demands of their business begins to exceed the company’s ability to raise additional capital through other channels at attractive terms.
However, simply being in need of capital does not mean going public should be your next step. There are certain questions (about your business) that you must answer before deciding whether to go public or not:
7 Questions to Ask Before Taking your Company Public
1. Does your business have an attractive track record?
If your business outpaces the industry average in growth, it will have a better chance of attracting prospective investors than another with marginal or inconsistent growth. No investment banker wants to underwrite an offering that will most likely end in a fiasco.
So, underwriters look for companies that can fulfill several tried and true criteria to boost the chances for a successful offering and good market performance. Below are some of the most important indicators that your company will succeed if taken public:
- An attractive product or service that has unbeatable unique selling points and caters to a large market
- An experienced management team
- A positive trend of historical financial results
- Favorable financial prospects
- A focused business plan
- Strong financial, operational, and compliance controls.
2. Are your products and services highly visible and of interest to both consumers and investors?
If your business is established, your historical sales data can help you answer this question. But if it’s still in the early stage, you can use market projections and demonstrated product superiority. Even though it is generally believed that established businesses are most ripe for being taken public, early-stage companies with unique and promising offers can be good IPO candidates, too.
3. Has your business reached the point at which it has bright chances of maintaining a strong sales and earnings growth trend in the future?
Your business will most likely go public successfully if it has illustrated market support for your products or services that would sustain an increasing annual growth rate over a period of time.
4. Are you ready to file timely financial statements with the Securities and Exchange Commission (SEC)?
One of the obligations on public companies is to file quarterly and annual financial statements with the SEC, with prescribed data requirements and required adherence to strict accounting and disclosure guidelines.
Bear in mind that these financial statements are due relatively soon after each period end. So, you will always be under pressure to report your finances timely—unlike what obtains in most privately-held companies.
The quality of your leadership team is an important factor. Having a board of directors and management team that has the right blend of experience and skills will help your business gain credibility with the investing public.
For your business to have a successful IPO, your management team must be committed to the time and effort involved in meeting registration requirements, conducting analyst meetings, and providing financial reports required by the SEC and other documents required by shareholders on timely basis.
It must also be ready to prepare financial reports well in advance of the offering, as this will help to ensure compliance with full disclosure requirements and reporting deadlines—both of which are necessary to maintain credibility and investor confidence after the IPO.
6. Do the benefits outweigh the costs?
Remember, selling equity means you will be permanently forfeiting a portion of the returns associated with corporate growth. Also, you must bear in mind that raising equity capital in public markets can entail substantial costs. You need to weigh these against the benefits that your business stands to gain from going public before making a decision.
7. Is the market right?
Stock market volatility is one of the most unpredictable aspects of going public. The demand for initial public offerings can vary dramatically, depending on the overall market strength, the market’s opinion of IPOs, industry economic conditions, technological changes, and many other factors.
In essence, before going public, it is very important that you study how market conditions will affect the valuation of your company and the likely pricing of your stock.