Managing

going public

PUBLIC OFFERINGS ARE on the increase.
SHOULD YOU CONSIDER ONE?

Nick P. Tootle, CPA

With increased regulation in the past five years and highly publicized enforcement actions against CEOs, CFOs and public companies in general, you’d think that going public would have become less popular. But the number of IPOs—initial public offerings of a corporation’s common shares on a public stock exchange—has kicked back up. After slowing in 2002 and 2003, the numbers began an upward turn in 2004 and have continued in that direction. In first half of 2007, 101 IPOs occurred, compared to 83 in the same period in 2006.
The benefits are persuading more business owners to accept the costs, hassles and risks of going public. Should you consider a public offering?
Imagine that you have a great widget company, Tootle Widgets, that your family built from the ground up. Your latest widgets are ground-breaking and leading edge. These are the widgets of the future, but the cost to get them to market and build awareness will be substantial. Do you have enough personal resources to do so and become spectacularly rich? If you’re like most widget makers, probably not.
The best way for a company to get rich or grow dramatically is with other people’s money (fondly referred to as OPM).
And how can you get OPM? If you don’t want to go into debt, you can sell part of your company to a private equity firm and get the funding you need. But it may cost you more than it’s worth. Because private equity is generally looking for a company to improve and then resell, these new owners will be looking to take control of your widget company, and probably make some serious changes that you may find unpleasant. A public offering is more palatable to many business owners, but this strategy has its own benefits and risks.

The pros and cons of a public offering
A public offering certainly has benefits. Among them:
• Available capital. There’s an unlimited amount of money out there if you have a company or product that the world likes. Google’s 2004 IPO is a well-known example—offered at $85 per share, shares went for $100 on the first day, and the 6-year-old company raised $1.6 billion to fund a wide array of expansions, acquisitions and enhancements.
• Liquidity. When you go public, your holdings become liquid. As the majority owner of a private widget company your options are limited. Once it’s a public company there’s a market for your shares, which puts you in a more flexible position. Your stock becomes currency. For example, you can use shares to acquire a pesky competitor without laying out any cash.
• Secondary offering. If you need more money for a plant expansion, strategic acquisition or marketing investment you can do a secondary offering to raise it.
• Ego. Going public can be great for your ego. Even on your best day as a private owner, it takes tremendous effort to get the press interested in your activity. When your company is public, all the information is public. Your grand successes could be front page news, because you’re not just making money for yourself, you’re contributing to the growing wealth of every shareholder.

Of course, there are many reasons why going public might not be the right choice. Things to consider:
• Short-term vs. long-term thinking. Because you’re now accountable to shareholders, your definition of success may need to change. Now you must focus on stock price and shareholder value. Your shareholders—particularly institutional investors—may have less patience and more of a short-term focus. Immediate results are prized; long-term investments are less well-received.
• Risk tolerance. When you’re public, the light is always on you. Shareholders and the media see all the decisions you make. Any “gray area” you might have considered worth the risk as the majority owner of Tootle Widgets disappears. Decisions should be black and white, and more risky choices are off limits.
• Costs. A public company may have more capital to work with—but expenses are higher, as well. The costs of going public and operating in the public markets include compliance costs, like the professional fees associated with reporting. You’ll have to establish an investor relations department, and procedures to communicate with shareholders. You’ll need more and different insurance, including Directors’ and Officers’ insurance for your board, since a public company might be a target for litigation.
• Internal Controls. Public companies are required to have more robust control processes than a private company may need. Formalized and documented internal controls are required for public companies over a certain size.
• Ego. If you go public, you don’t own your company anymore. For some entrepreneurs this is a shock. The owner is the shareholder—not the small group of like-minded friends and relatives who helped you build Tootle Widgets, but the world of shareholders. These can be people whose goals don’t match your own.

What are the steps?
If you decide to go after some OPM through a public offering, be prepared for the work involved. Here is a general review of the steps, but it’s critical to consult qualified professionals who have been through the process before.
First, you must file a registration statement with the Securities and Exchange Commission. These statements become public immediately upon filing, but you can’t start selling shares until the SEC declares it effective. The first part of the registration is the “offering document” or “prospectus.” In this document, you disclose facts about the operations, financial condition and management of the business. Anyone you offer shares to must have the ability to see the prospectus. The second part contains additional info that you don’t have to deliver directly to the investors, but they can see it by requesting it from the SEC.
SEC staff will review your registration statement for compliance with disclosure requirements, and request clarification if necessary. If they find that it is complete, accurate, and not misleading, they declare it effective.
Then you begin the process of selling your securities. You’ll need to be accepted onto an exchange or market such as the New York Stock Exchange or the NASDAQ. You’ll have to find an underwriter to offer your stock for sale, generally an investment bank that offers it to individual or institutional clients. You’ll present the offering to these potential buyers in a road show, which is the real selling part of this process. If you like making presentations, this could be fun. If you don’t, your underwriter may provide critique and coaching.

Things to keep in mind
Here are five key items you should keep in mind if you’re considering a public offering.
1. Know what your company is worth, and have evidence to back it up. A professional business evaluation may be the best way to establish this.
2. Long-range plans are essential to attracting investors. They’ll want to know what you’re going to use the money for, and what kind of returns to expect over the next several years.
3. Keep your mouth shut. Regulation FD (Fair Disclosure) effective in October 2000, requires that publicly traded companies must disclose material information to all investors at the same time. It’s intended to prevent insider trading. The July 2007 incident involving Whole Foods CEO John Mackey’s web postings raised questions (and launched an SEC investigation) regarding Regulation FD.
4. Know your responsibilities for corporate governance. The Sarbanes Oxley Act raised the bar, requiring the CFO and CEO to certify the accuracy of the financial reporting. If you take this signature lightly, it is at your peril: This is where lawsuits can begin.
5. Have a thick skin. At every stage of this game you’ll face people who lack confidence in your company, your product, your management skills or your prospects for success.

Nick Tootle is a principal in the Audit department of Kaufman, Rossin & Co., one of the largest independent accounting firms in Florida, with clients throughout the state and in more than two dozen countries. He can be reached at ntootle@kaufmanrossin.com.