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Should Your Small Business Go Public? Consider the Benefits and Risks of Becoming a Publicly Traded Company

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Should Your Small Business Go Public? Consider the Benefits and Risks of Becoming a Publicly Traded Company

By JamieD
Published: October 19, 2009 Updated: February 17, 2011

Are you thinking of taking your business public? "Going public" can be a very complex process and shouldn't be rushed into. Many businesses consider going public as a means to raise additional capital. While this is possible, it's much more complicated than that. Before you decide to attempt the transition, check out this quick guide to understand the who, what, where, when, and why of going public.


Who


Many businesses, from start-ups to established companies, may consider becoming a public company. The most important thing to consider when deciding if going public is an option for your business, is knowing that you can demonstrate significant future growth potential. If you can prove that your business is not only profitable now, but will annually increase sales and earnings, then you have a chance at becoming a successful public company.


What


When a business decides to "go public", it's done through an initial public offering (IPO). An IPO takes place when a company's equity is sold through an investment banking firm. That equity is formed into shares of common stock that are intended to be traded on a legitimate stock market.


Where


Initial public offerings are conducted by investment banking firms. To find the right investment banker for your business, you'll have to do your due diligence. Find a firm that has done IPOs that are comparable in size and scope to that of your business. Several important industry resources include:

Many small businesses that become public companies end up on the Nasdaq SmallCap Market or the Nasdaq National Market System


When


It's difficult to label the "right" time to go public because companies can make the leap in different stages. A good rule of thumb may be to compare your business data and statistics with those of successful public companies. Many successful public companies have at least an annual growth potential of 20%. By comparing your self to other businesses that have gone public, you'll have a better understanding if your business is ready or not. For more information on the possibility of becoming a public company, or any other issues that arise with IPO's, contact the U.S. Security and Exchange Commission's Small Business Ombudsman.


Why


Businesses chose to become public entities for many reasons. It's important to weigh the "pros" and "cons" before making such a decision.
Important benefits...


  • Your access to capital will increase - many companies "go public" to raise additional funding that doesn't need to be paid back

  • Your business will have direct access to capital markets and can raise additional funds by issuing additional stock in a secondary offering

  • You'll generally have an easier time raising private funds

  • Your business will become more recognizable and gain credibility

  • Business can often attract more highly qualified employees by offering stock options, bonuses, and other incentives with a known market value

  • Public companies are worth more than private companie


Important concerns...


  • IPOs are one of the most expensive ways to finance a business - the fees and expenses of "going public" can reach six to seven figures

  • An IPO is extremely time consuming

  • Many businesses fail trying to become IPOs - typically less than 1,000 businesses a year are successful

  • You must keep all shareholders informed on business operations, financial and management conditions, and new legal obligations - Your business could be liable for failure to fulfill those obligations

  • You will most likely lose some management flexibility in your business affairs

 

Additional Resources

 

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Comments:

Another structuring factor is that it is always superior to do filings from scratch when going public rather than the typical reverse mergers with shell corporations. A company can be structured from scratch correctly with out a lot of constraints from pre-existing structure. ---This post was edited to remove a commercial link. Read our discussion policies for more Community best practices.
If the transaction is structured correctly, going public is ALWAYS the superior choice over not going public. The leverage and advanteges will always outweigh not going public provided the transaction is structured properly. The only reason people do not get the full benefit of going public is because of poor structuring from their consulting investment bankers and attorneys etc.
Interesting post. I would say that, under current conditions, it wouldbe better for a company considering going public to resist thetemptation. Increasing government infuence in the market should make any CEO warry. As an American living and working in Medellin Colombia I can say that it is a joy to do businees in a country with lessrestrictions/taxes on small businesses.Medellin ColombiaJamieD wrote:Are you thinking of taking your business public? 'Going public' can be a very complex process and shouldn't be rushed into. Many businesses consider going public as a means to raise additional capital. While this is possible, it's much more complicated than that. Before you decide to attempt the transition, check out this quick guide to understand the who, what, where, when, and why of going public.WhoMany businesses, from start-ups to established companies, may consider becoming a public company. The most important thing to consider when deciding if going public is an option for your business, is knowing that you can demonstrate significant future growth potential. If you can prove that your business is not only profitable now, but will annually increase sales and earnings, then you have a chance at becoming a successful public company.WhatWhen a business decides to 'go public', it's done through an initial public offering (IPO). An IPO takes place when a company's equity is sold through an investment banking firm. That equity is formed into shares of common stock that are intended to be traded on a legitimate stock market.WhereInitial public offerings are conducted by investment banking firms. To find the right investment banker for your business, you'll have to do your due diligence. Find a firm that has done IPOs that are comparable in size and scope to that of your business. Several important industry resources include:U.S Security and Exchange Commission's New Registration Report*IPO Central*Many small businesses that become public companies end up on the Nasdaq SmallCap Market or the Nasdaq National Market SystemWhenIt's difficult to label the 'right' time to go public because companies can make the leap in different stages. A good rule of thumb may be to compare your business data and statistics with those of successful public companies. Many successful public companies have at least an annual growth potential of 20%. By comparing your self to other businesses that have gone public, you'll have a better understanding if your business is ready or not. For more information on the possibility of becoming a public company, or any other issues that arise with IPO's, contact the U.S. Security and Exchange Commission's Small Business Ombudsman.WhyBusinesses chose to become public entities for many reasons. It's important to weigh the 'pros' and 'cons' before making such a decision.Important benefits...Your access to capital will increase - many companies 'go public' to raise additional funding that doesn't need to be paid backYour business will have direct access to capital markets and can raise additional funds by issuing additional stock in a secondary offeringYou'll generally have an easier time raising private fundsYour business will become more recognizable and gain credibilityBusiness can often attract more highly qualified employees by offering stock options, bonuses, and other incentives with a known market valuePublic companies are worth more than private companiesImportant concerns...IPOs are one of the most expensive ways to finance a business - the fees and expenses of 'going public' can reach six to seven figuresAn IPO is extremely time consumingMany businesses fail trying to becoming IPOs - typically less than 1,000 businesses a year are successfulYou must keep all shareholders informed on business operations, financial and management conditions, and new legal obligations - Your business could be liable for failure to fulfill those obligationsYou will most likely lose some management flexibility in your business affairsAdditional ResourcesSecurities Laws, Financial Reporting, and Investor ResourcesSBA Guide on Selling to the Public - Initial and Direct Public OfferingsSEC Statues, Rules, and FormsNote: * Hyperlink directs reader to a non-government Web site.Message Edited by JamieD on 10-19-2009 01:40 PMMessage Edited by NicoleD on 10-19-2009 02:06 PM

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