An entrepreneur often launches a business with the idea that one day he’ll take the business public. The question then becomes: When is the best time to take a company public?
A business owner most often takes his company public when he needs extra capital for expansion. If he attempts to go public with the business in a desperate move to gain capital for the business to survive, it’s often the wrong move.
The Security and Exchange Commission addressed the issue of when/if to take a company public in its publication: Should My Company Go Public? According to the SEC, “When your company needs additional capital, going public may be the right choice, but you should weigh your options carefully.”
Generally, the best time to take a company public is when:
—The business needs money for expansion, not to survive;
—The business has the initial money needed to take the company public properly;
—The business has adequate to staff to administer a public company and the/or the expansion process; and,
—The business is on strong footing in the marketplace and going public would not jeopardize that growth.
It Takes Money to Make Money
The first two issues covered are intertwined as they involve money. A company can go public in a limited way. With a limited public offering, a company can raise money while spending a minimal amount for basic registration fees. When a company goes public (fully) the registration fees increase, so if a company’s aim is to go public, it has to have the money necessary to pay the fees associated with the move.
Since taking a company public involves additional costs and legal obligations, the business owner must thoroughly understand the process. That involves accountants and lawyers and lots of paperwork. All of these involve increased expenditures, so again, if the aim is to raise money for a fledgling business, it’s defeating the purpose.
If the purpose of taking a company public is to attain working capital, particularly if the business is in its infancy, business owners have other options to consider. It may be wiser to apply for a loan from the Small Business Administration. Another option the SEC recommends is “selling securities in transactions that are exempt from the registration process.”
Beyond the money aspect, taking a company public involves changing the very nature of the company in terms of management. Here are a few of the obligations of a publicly traded company, according to the SEC.
–The transition from sole proprietor or partnership to public involves increased legal obligations. If the business owner fails to meet those obligations, he can be held liable legally.
–If the company is taken public and involves shareholders, those shareholders will want information on their investment. They have to know the company’s financial condition, upcoming costs, legal obligations and the general financial status.
–From a legal standpoint, when a company goes public, it must function within certain parameters that a sole proprietor doesn’t have to adhere to. An owner who takes his company public loses the ability to act on gut feelings. Shareholders are involved, and they may have a say in the dealings of the company. That costs the business owner flexibility to act on current market conditions quickly.
–A publicly-traded company costs money to maintain. There are regular meeting which means the owner must have someone taking minutes and translating all that information into a written form that can be viewed by shareholders. It takes time away from the actual business and it costs money in extra manpower to keep up with the legal obligations.
The decision to take a company should not be taken lightly. Before a business owner makes that decision he should consider the personal, financial and legal ramifications of such a move as it will follow the company and its founders for the life of the company.…
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