Get your ducks in a row before going public
How many small business owners refer to their company as “my baby?” And like any caring parent, a business owner wants what’s best for their child, but can find it tough to let go of control. However, unlike children, not every company should “leave home.”
“You really need to look at your reasons for going public,” says Sean Zaboroski, a lawyer with Sunmark Law Professional Corporation, and principal of Law Genie, a business law firm that assists entrepreneurs with securities law and public company listings. Knowing the pros and cons of going public is the first step toward setting up your small business for an IPO.
Knowing your why
Your main goal in going public will always be to access capital. “Public companies are just more appealing for investors,” says Zaboroski. If you need more liquid investments it will be very difficult to convince investors, especially ones who aren’t personally close to you, to give money to a private company.
Other small business owners may choose to go public because they want an exit strategy to gain access to more liquid cash or to diversify their net worth.
Going public can have sex appeal for certain companies — especially those that are web- or retail-based.
“You can enhance the status of your company by going public,” says Zaboroski. “Many investors and clients will like the fact that you’re listed on the stock exchange.”
For Oakville-based small business owner Terry Frendo, there is another reason to look at going public. “For me, going public is not just about the money,” says Frendo, CEO and publisher of IFM Media Inc. “The investors would need to bring something else to the table.”
For going public to make sense, Frendo would need a celebrity investor or someone with digital space who would bring a new element to his company. Ruling out the drawbacks If going public looks appealing to your company, it’s time to analyze the potential drawbacks (and there are quite a few), to see if getting an IPO truly makes sense for your company in the long term.
First, going public is expensive. Expect to pay a minimum of $60,000 to $470,000 for a straightforward, nowrinkle IPO listing that takes about 100 days. A TSX venture listing, for example, can cost upwards of $150,000. Do you have enough funds to cover this? Where are the funds coming from and is the benefit of going public going to be worth the upfront expense? Funds could come from a variety of sources — including self-financing, raising capital through investment or by using the company’s equity.
If getting an IPO makes financial sense, you need to decide if a public company fits with your personality and the way you want to run your business. “Right now, I’m one person with a voice and a vision,” says Frendo. “I love what I’m doing and don’t want to be limited by a board.”
When you go public, you will need at least two independent directors, who don’t have a large stake in the company, on your board of directors. You’ll also need to pass decisions by an auditor and a lawyer.
Early IPO planning matters
If going public is truly in the best interest of your company, it helps to plan ahead. The first step is to get your finances in order. Start keeping proper records, as if you were being audited, accounting for every receipt and all income. Hire an accountant, who has experience working with public companies and a deep understanding of the company’s responsibility to shareholders and the public at large.
“You’ll need up to three years of audited statements,” says Zaboroski; so keeping your books in good order can save a lot of time and headaches.
Start building your team. Find an investment banker or underwriter to help gather investments. You want someone who is interested in your story and really wants to see you become a success.
It also helps to get as much private traction as possible, as it will give your company a higher valuation upon going public. Going public shouldn’t be a first step; you should always exhaust all your private sources of funding first.
Start looking early for a lawyer who will be your “quarterback” and work with your company to execute the IPO, handle costs, deal with auditors and help search for your board of directors.
Just like building your business, you need the right team in place to make going public a smooth and successful transition.