Go Public
Going Public, involves selling a small company to the masses. If a small company has real potential to become much larger the fourth sales exit for the company that involves selling it to the masses, should be considered.
It can be done in four basic steps. First, the owner raises capital to (a) hire a replacement management team with industry expertise and a solid track record of performance preferably in running a public company and (b) to afford the expense of a public registration. Step Two requires public registration of the company’s securities (stock). Taking a company public can involve an Initial Public Offering underwritten by a SEC registered investment bank NASD Member Broker dealer. It also can be done as a simple listing on the Pink Sheets or Over-The-Counter Bulletin Board (OTCBB) "In-house" with proper guidance. It can also be achieved through a reverse merger into a public shell.
Going public is expensive, time consuming and requires a corporate mentality. A public registration on a major exchange such as NASDAQ, AMEX or the NYSE requires several years of audited financial statements that emphasize earnings. Small companies typically have un-audited financial statements with a minimal earnings record. Step Three requires auditing the company’s past financial performance with emphasis on demonstrating earnings.
Step Four, requires working with an SEC registered investment bank to oversee the registration process. Underwriting, SEC legal counsel, registration and printing for registration on a major exchange can cost $750,000 to $1,000,000, or more. Pink Sheet, OTCBB, and reverse merger listing may reduce this cost and speed up the registration time frame, but may sacrifice market making and share price which will lower returns to the business owner. The public registration process can easily take 6 months, or more. During this period, going public requires constant attention by the company’s owner that can often be a business distraction.
Entrepreneurs have a tendency to put personal reward before company financial performance, and often blur the line that differentiates company and personal expenses. They pay themselves high salaries in order to minimize the company’s net income and taxes. Personal material items such as cars, boats, and consumer electronics are often purchased as company assets.
Public corporations however need to accurately report and demonstrate financial performance to their shareholders. After tax net income becomes highly important as it directly translates to earnings per share. There must be a clear distinction between what are corporate and personal assets and expenses. The entrepreneur soon realizes that going public infringes on his control, liberties, and freedom. Consequently, the entrepreneur needs to transform to a corporate culture…often necessitating a paradigm shift in thinking and sophistication that many small business owners are unable or unwilling to do.
Initially, market makers can sell the company’s potential to the masses, but once public the company needs to demonstrate revenue growth. The small company must have a strategic plan that can depict and justify the public companies growth potential. Without growth, the public masses return on investment would not increase.
The entrepreneur does not attain liquidity immediately after his company becomes public registered. Normally, the SEC and underwriter require the owner’s stock to be locked up for at least 12 months. Hence, the owner can’t sell his stock during this lock up period. If the company failed to grow during this period it is highly likely that its stock price would decline. Unless the company became quite large, once the owner starts selling, the stock price may fall. Assuming the company’s stock is closely held, if the public masses feel the owner is selling due to lack of faith in the company’s future, the company’s share price may suffer.
Going Public as a small company does have some serious drawbacks. The first problem is in Step One, access to capital. Unless the small company is quite profitable, the business owner’s access to capital is very limited. Without about $1 million in capital to finance the process, the ability to go public is limited. The second problem is with Step Two. Without sufficient capital, proven skilled management, growth potential, and size (as measured in revenues or profits) it is difficult to get an investment bank to underwrite the offering. The third problem is with Step Three…that the company’s financial statements are usually un-audited, and even if audited, would not show substantial earnings. The fourth problem is that going public takes a major commitment by the business owner and without a deep management team, the owner’s business may suffer during the process.
There is a fifth problem of going public that occurs after being public. If the small company is incapable of raising significant capital going public, the annual cost of being a public company and maintaining a publicly listed status with the exchange is expensive. As a public company it is required to report on a quarterly and annual basis. The reporting requires additional sophisticated financial staff and SEC counsel. The annual cost of being a public company can easily be $1 million, or substantially more. Consequently, small company’s often find that this cost is too prohibitive and the majority of the capital raised through the public offering would be consumed by these additional overhead costs. If the company’s net worth declines it can be de-listed.