Should Your Small Business Go Public? Consider the Benefits and Risks of Becoming a Publicly Traded Company
by JamieD, Former Moderator
- Created: March 23, 2010, 11:41 pm
- Updated: February 10, 2011, 4:33 pm
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.
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.
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.
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
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.
Businesses chose to become public entities for many reasons. It's important to weigh the 'pros' and 'cons' before making such a decision.
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 companies
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
Note: * Hyperlink directs reader to a non-government Web site.
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