". . . the company will eventually go public providing its investors with significant capital gains on their investment."
The above statement has become boilerplate in the business plans of start-ups. While every entrepreneur dreams of going public and while going public is an excellent exit vehicle for investors, you must consider the pros and cons of an IPO - at the earliest possible stage in your company's life. Companies go public for many reasons - and not always the right ones. Before deciding on a public offering you must carefully consider the advantages and disadvantages of going public. Remember that going public is only one way to obtain capital and that this process takes a tremendous amount of your two most valuable resources - time and money.
Today's Enable outlines the advantages and disadvantages of going public. We also touch upon the costs involved and some alternatives.
The Advantages Of Going Public
The first advantage of going public is the most obvious one - access to long-term capital. However, as you will see below, there are other ways of obtaining capital that are easier and less time consuming than going public. Additional advantages include:
- Increase your market value
- Position your company for financing growth
- Leverage regarding negotiating an acquisition or merger
Moreover, for Israeli companies a key advantage of going public (in foreign markets) is that it can help you gain visibility and provide a greater sense of security for potential suppliers, customers, and partners. In addition, public offerings enable you to develop stock option plans that can be an advantage in attracting and keeping talented personnel.
The Disadvantages Of Going Public
Forget about so called overnight success. The process of going public is long, time consuming and costly. Probably the biggest disadvantage is the time that you will have to spend during the process - time you will not be spending on the business and technological aspects of your company. There is planning and preparation time, as well as taking the time to respond to investor inquiries, to make presentations to the investment community, and to write, print and distribute quarterly and annual reports. Furthermore, increased communication and disclosure requirements mean that the details of your company's business, operations and finances are open to public scrutiny and to your competitors.
Additional disadvantages include:
- Share-price management
- Heavy pressure on management to increase market value
- Life in a fishbowl
- Increased expenses
- Loss of voting control
The Costs
An initial public offering also costs a great deal. Although you'll recover your costs if the offering is successful, there is no guarantee of success. There are costs involved in every step of the process - before, during and after the offering. First, there are costs involved in getting the company into public shape. This includes paying audit and accounting fees, legal fees, salaries for possible additions to your management team, and directors' fees for a strong, independent board.
Then you have to deal with the costs of the offering itself. The biggest costs here are the underwriters' fees, which can range from 6 to 10 per cent of the gross proceeds of the offering. In addition, you can expect audit and accounting fees, legal fees, printing costs, the cost of a road show and miscellaneous expenses.
Following the offering you have the ongoing costs of administration and reporting. Do not forget that this includes hiring both internal and external personnel to handle investor relations and the vast amount of paperwork involved in the administration process.
Alternatives To Going Public
There are several alternatives to going public including:
- Commercial loans
- Venture capital
- Private placements
- Selling the company
- Reverse takeover or merger
The process of going public is difficult, time consuming and costly - do not simply make it a boilerplate addition to your business plan.
Published by Israel's Business Arena on March 14, 2000.