In this next series of articles, I summarize the advantages and disadvantages of the different exit options available to business owners. The first option I will be covering is taking a business public.
Taking a company public through an Initial Price Offering (IPO) has both advantages and disadvantages. Here is a breakdown of the pluses and minuses followed by an overview of the IPO process:
Advantages –
- Access to Capital:
An IPO allows a company to raise substantial capital by selling shares to the public. This capital can be used for expansion, research & development, paying off debt, or other strategic initiatives.
- Increased Visibility and Credibility:
Being publicly traded often increases a company’s visibility, which can enhance brand recognition and brand reputation. A public listing can also add credibility with customers, suppliers, and potential business partners.
- Liquidity for Shareholders:
An IPO provides liquidity for existing shareholders, including early investors, founders, and employees, who can sell their shares on the open market. Publicly traded shares can, furthermore, be used as currency for acquisitions or as part of employee compensation packages, attracting top talent.
- Growth Opportunities:
Being public provides a market-driven valuation of the company, which can help in strategic planning and decision-making. The capital raised from an IPO can fuel growth opportunities, such as entering new markets, developing new products, or acquiring other companies.
- Enhanced Governance and Transparency:
The process of going public often leads to improved corporate governance and financial practices, as the company must adhere to stringent regulatory requirements.
Disadvantages –
- Cost and Complexity:
Going public is expensive, with significant costs associated with underwriting fees, legal fees, accounting fees, and ongoing regulatory compliance. The IPO process is also complex and time-consuming, requiring significant management focus and resources.
- Regulatory Scrutiny:
Public companies are subject to extensive regulatory requirements, including quarterly and annual reporting, internal controls, and disclosures. Public companies must disclose detailed financial and operational information, which can expose business strategies and performance to competitors and the public.
- Market Pressure:
Public companies often face pressure from shareholders and analysts to meet short-term earnings targets, which can lead to decisions that may not align with long-term strategic goals.
The company’s stock price may fluctuate based on market conditions, investor sentiment, and factors beyond the company’s control.
- Dilution of Ownership:
Issuing new shares during an IPO dilutes the ownership percentage of existing shareholders, including founders and early investors.
- Loss of Control:
Depending on the amount of equity sold, the owners may lose some control over decision-making, especially if activist investors or large institutional shareholders exert influence.
- Ongoing Obligations:
Public companies must continuously file reports with the SEC and maintain transparency with shareholders, which can be burdensome. Managing investor relations and maintaining shareholder confidence also requires ongoing effort and resources.
In summary, going public can be a powerful way to raise capital and accelerate growth, but it comes with significant trade-offs in terms of cost, regulatory obligations, and the potential for market-driven pressures. Companies considering an IPO need to weigh these positives and negatives carefully and assess whether going public aligns with their long-term strategic goals.
For those exiting owners who decide to position their business for an Initial Public Offering (IPO,) getting there requires careful planning and execution.
Here are the steps involved in the process of taking a company public:
- Assessing Company Readiness:
The company must have a strong and stable financial record. This includes consistent revenue growth, profitability, and a solid balance sheet. The company’s business model should also be scalable, with potential for future growth. Because investors need to see how the company can expand and increase profits. In addition, the business must have a strong governance structure, including an experienced board of directors and a transparent decision-making process.
- Hiring Advisors:
The company’s owner(s) must next engage with investment bankers who will underwrite the IPO, help set the offer price, and market the IPO to potential investors. Legal counsel specializing in securities law is also essential to ensure compliance with all regulatory requirements. In addition, the company’s owners need to hire auditors to conduct a thorough audit of the business’ financials for the IPO filing.
- Preparing Financials:
The company will need at least three years of audited financials by a reputable firm and develop detailed financial projections to demonstrate future growth potential. Moreover, the company will need to strengthen internal controls over financial reporting to prevent any potential issues that could arise during or after the IPO process.
- Enhancing Corporate Governance:
The company will need to recruit a diverse and experienced board of directors that adds credibility to your company.
- Drafting the Prospectus:
The company’s owners will need to work with legal and financial advisors to draft an S-1 registration statement, which includes detailed information about the business and its’ financial condition & risks.
The S-1 must be sent to the Securities and Exchange Commission (SEC) for review, and the owners of the company must be prepared to respond to any questions or comments from the SEC.
- Promoting the IPO:
The team will need to develop a compelling narrative to present to potential investors. The “roadshow” is where the business owners and their advisors present the company to institutional investors and gauge interest in the IPO.
- Setting the IPO Price:
Based on feedback from the roadshow and current market conditions, the investment bankers recommend a price range for the IPO and determine the final offering price.
- Launching the IPO:
Once the company is listed on the stock exchange (e.g., NYSE or NASDAQ,) the investment bankers are ready to launch the IPO. During the first day of trading, the investment bankers monitor the first day of trading and manage investor relations.
- Post-IPO Management:
After the company’s stock starts trading, the company must establish a strong investor relations team to communicate with shareholders and manage expectations. The company also needs to comply with SEC regulations, including regular financial reporting and disclosures.
- Long-Term Strategy:
Long-term, the company should ensure that the business continues to meet or exceed the expectations set during the IPO process. The company must also focus on opportunities to fully leverage the capital raised from the IPO – to fund expansion, innovation, or other strategic initiatives. Depending on market conditions and business needs, the company may need to consider additional stock offerings in the future.
Each of these steps involves significant detail and collaboration with professionals who specialize in IPOs, so careful planning and execution are key to a successful public offering if you choose this exit option.
About Greater Prairie Business Consulting, Inc.:
Greater Prairie Business Consulting, Inc. is an award-winning, national consulting practice serving entrepreneurs, small to mid-sized privately held and family-owned businesses and middle market companies of any type with revenues between $1 million and $250 million. The firm helps small, mid-sized and middle market companies maximize their performance and exit.
Greater Prairie Business Consulting, Inc. can be reached by calling 1-800-828-7585 or emailing info@gpbusinesssolutions.com.
About the Author:
James J. Talerico, Jr. is an award-winning author, speaker, and a nationally recognized small to mid-sized (SMB) business expert.
With more than thirty- (30) years of diversified business experience, Jim has a solid track record and an A+ BBB rating helping thousands of business owners across the US and in Canada tackle tough business problems to improve the performance of their organizations.
His client success stories have been highlighted in the Wall St. Journal, Dallas Business Journal, Chicago Daily Herald, and on MSNBC’s Your Business. He was named “Texas Business Consulting CEO of the Year,” by CEO Today Magazine, identified as a “Top 10 Management Consulting Entrepreneur to Watch in 2023” by Entrepreneur Magazine, was listed among the “10 Most Visionary Companies to Watch in 2023” by Inc. Magazine, and has also been ranked among the “Top Small Business Consultants” followed on Twitter.
For more than half a decade, Jim was a regular guest on “The Price of Business,” a nationally syndicated radio program on Bloomberg Talk Radio and has also appeared as a subject matter expert on many FOX Radio interviews. He is a regular contributor to several blog sites and has frequently been quoted in publications like the New York Times, Dallas Morning News, Philadelphia Inquirer, The Entrepreneur’s Review, and on INC.com, in addition to numerous, other industry publications, radio broadcasts, business books, and Internet media.
Jim received a Gold “Stevie Award” for “Thought Leader of the Year,” a Gold “Stevie Award” for “Media Hero of the Year During Covid” and a Bronze “Stevie Award” for “Best Entrepreneur” in the Category of “Business and Professional Services” at the American Business Awards ® in New York City. The competition received more than 3,700 nominations and is the premier accolade for business excellence in the US honoring organizations of all sizes and industries. Jim also received an “Outstanding Leadership Award” at the Money 2.0 Conference for his contributions to the financial services industry.
Jim is the author of “8 Steps to Becoming an ETHICS FOCUSED ORGANIZATION,”™ a small business certification program that utilizes a unique eight – (8) step approach for strengthening ethics in any organization. The certification program won the Better Business Bureau’s “Torch Award for Ethics” for the North – Central Texas Region, the International Better Business Bureau’s “ Torch Award for Ethics,” and a Gold “Stevie Award” for “Ethics in Sales” at the International Sales & Customer Service Stevie Awards ®. Participants who complete this certification program are eligible to receive eight – (8) continuing education units from the University of Texas’ Division of Enterprise Development.
Jim received his Certified Business Exit Consultant (CBEC) ® designation from The International Exit Planning Association (IEPA) to help entrepreneurs, small business owners, family businesses, and middle market companies maximize their business exit, and he received his certification in succession planning from the ASPE.
Jim is also a Certified Management Consultant (CMC) ® and an active member of the Institute of Management Consultants.
Check out more business stories here.
