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Glossary

By MICHAEL CARTER

As our clients grow and mature, we are increasingly fielding their questions concerning IPOs: Should I go public? When? What underwriter? What is our public valuation? What do I need to do to prepare?

All we seem to read about is the success stories, but there is another side. There are important issues and risks entrepreneurs should understand and fully appreciate before taking the plunge.

 Ten reasons not to go public

1. Your Company is Not Prepared - Ask yourself: (1) Can you predict with some certainty your financial results during the next twelve months? (2) Is your financial house in order? (3) Are your internal accounting systems and controls adequate? and (4) Are you psychologically ready to manage a public company? (see side bar on page 2 'Are You Ready To Go Public?')
2. Loss of Confidentiality -- Confidentiality, often critical to a business, is gone. By going public you allow your suppliers, customers, employees, competitors, and potential new competitors access to a great deal of important information such as: financial details of your business, description of how the IPO proceeds will be used, your strategy for growth, future business prospects, dependence on customers, owner's compensation, and current litigation.
3. Emphasis on Short-Term Results -- The pressure for short-term operating results is enormous. The market values your company on its future earnings prospects not on its past results; therefore companies are treated harshly when quarterly results fall off the expected trend. Punishment can take the form of calls from shareholders, articles in business papers, analyst reports and even shareholder litigation. This pressure often tempts management to make short-term decisions that could have a harmful long-term impact.
4. Full Disclosure and Reduced Flexibility for Insiders -- Many private companies have dealings with their business owners that are acceptable when operating as a private company but must be discontinued when becoming a public company. Transactions between a company and its officers, directors and large shareholders must be reasonable and fully disclosed. Each officer, director and holder of 10% of a public company is deemed an "insider" and must disclose his/her holdings and any subsequent changes. The benefit of gaining liquidity is offset by public scrutiny of all stock trades and regulatory restrictions on insider trading activity.
5. Reduced Flexibility and Control -- As outside shareholders are added, the entrepreneur's power to control the company is weakened. Shareholders and directors must be included in decisions which you and your management team previously would have made in one or two meetings.
6. Not an Immediate Exit Strategy -- An IPO is often viewed as an exit strategy for the business owner. Often the owner may not exit as quickly as he may think. In fact, most underwriters, depending upon the business circumstances, will only allow the owner to "cash out" up to 20% of the IPO proceeds. If you are looking for a quick exit, the private sale of your company will often bring a higher value and might also meet your personal objectives of "slowing down".
7. IPO Market Changes -- The IPO market is extremely cyclical and often volatile. The market could deteriorate, or your industry could fall out of favor just prior to your IPO. The possible results include: (1) the valuation estimate is wrong, and therefore you give up more equity while raising the same amount of funds, known as a "haircut", (2) demand for your stock is weak; and therefore you need to cut back the amount of funds raised or (3) you can not go public and are left with significant expenses related to the aborted IPO.
8. Expenses of Going Public  -- Out-of-pocket expenses include: underwriters discount, legal, accounting and printing, which average 10-12% of gross proceeds. The most significant cost, however, often underestimated, is the amount of management's time and effort required to go public.
9. On-going Expenses -- Financial statements must be issued on a quarterly basis. Financial reporting is an on-going administrative burden that includes: regulatory reports, financial and investor public relations (often handled by CFO or CEO), annual meeting, legal expenses and offficers/directors insurance.
10. There's No Turning Back -- The process is essentially one way. Once your company is public, taking the company private can be difficult and costly.