Why Go Public? Weighing the Rewards Against the Costs

Many business people think “going public,” or doing an initial public offering (IPO), is the end-all be-all of being in business. The prestige alone will bring untold riches and happiness after the big event. Unfortunately, the truth is often exactly the opposite. If you go public in the forest and nobody is there to witness it, did you actually go public? I jest, but the reality is often not far from that. Being public means registering your securities with the SEC and state authorities and giving the market consistent, transparent disclosure. In return, you get an efficient marketplace for trading ownership in your company. That’s a powerful tool, but it isn’t the right one for everyone. Every advantage of being public comes with a cost.

The Advantages of Being Public

Since the Sarbanes-Oxley Act of 2002 (“SOX”), most business people have come to believe that going public isn’t the goal of every business. Private equity and leveraged buyouts have replaced it as the big event in many companies’ lives. Still, being public brings real benefits:

• Liquidity and an exit. Being public gives investors and founders an efficient, transparent market for their shares, and with it an exit strategy.
• Access to capital. Public reporting creates transparency, and that opens up more capital and more financing alternatives.
• Prestige and image. Public companies get more media coverage and more credibility with clients, employees and partners.
• A currency for growth. Your publicly traded shares become a second currency. Use them to fund operations, attract and keep top talent with stock options, and pay consultants and professionals.
• Cheaper acquisitions. In almost every case, public companies trade at higher multiples of revenue or earnings than private ones. That price difference lets a public company buy other operations for less than it would cost to build them.
• Diversification. Current shareholders can sell part of their holdings without selling the whole company.

That last one may be the slam dunk for going public. Many private business owners never get a liquidity event. They get stuck in their businesses without a chance to “take some of their chips off the table.” Going public lets them diversify without giving up the company.

The Disadvantages, and Why They Matter

The disadvantages are almost mirror images of the advantages, and they often overwhelm them:

• Loss of control. Founders and early management give up control, or at least feel like they have.
• Complexity and cost. Reporting requirements, fiduciary duties and management liability all go up after the IPO, and SOX compliance made all of them more expensive. As a rule of thumb, we have said going public costs about $250,000, plus about $250,000 a year to stay public, for the companies we typically serve. That figure dates from 2015, and today’s costs are likely higher.
• Two sides of the business. Once you’re public, you really run two companies: the operations and the publicly traded shares. Share performance can be driven by market sentiment, trading liquidity or promotional campaigns that have nothing to do with how the business is performing. We’ve seen shares do well while operations were absolutely putrid, and the reverse.

Is Your Company a Good Candidate?

The things that tip the scales toward going public vary from company to company. In our experience, the best candidates have four things in common:

1. A favored industry. The company is in an industry the investing public wants to invest in right now. If everyone is shunning your industry, you may not get the benefits you went public for.
2. Systems and people in place. Financial systems, software and experienced personnel, ideally professionals who have worked in a public company, are already there before the IPO.
3. Enough revenue or growth. The revenue base is large enough, or growing fast enough, to absorb the ongoing cost of public compliance comfortably.
4. Sound management and controls. Management is strong and internal controls are working. If current management needs to go, get your house in order before trying to go public.

You build these foundations long before an IPO. Our article Funding Structures: Building a Business That Can Borrow on Its Own covers the corporate structure and clean financial record every growing company needs. Communicating Your Business: The Essential Toolkit explains how to make your exit strategy and financials clear in your pitch deck. Building a Board of Advisors shows how to bring in people who have been through the process, without the cost of adding them to management.

Summary

Going public is a tool, not a finish line. It can give you liquidity, capital, prestige and a currency for growth. It also costs you some control, adds complexity and expense, and ties your company’s image to a share price you don’t fully control. All in all, the decision has to stand on its own, focused on liquidity, capital formation and building a sound foundation for faster growth.

• Know why you’re doing it. Liquidity, access to capital and a stock currency for growth are the strongest reasons to go public.
• Count the full cost. Expect real loss of control, higher liability and significant ongoing compliance costs.
• Remember the two sides. Your share price and your operations can move independently, so you have to manage both.
• Be ready first. A favored industry, strong systems, enough revenue and sound management make the difference between success and an expensive lesson.