If you are thinking about taking your private business public, there are a few considerations you have to make prior to your putting your first stocks for sale, or making an initial public offering (IPO). Before you make the move, consider these 10 factors.
- Industry: How is your company’s industry? It is better to make an IPO when your industry is in a good position. Otherwise, your company may be met with a less-than-enthusiastic greeting.
- Company: You need to make sure that the industry is in the right spot, but you have to be more certain that your company is. Your business has to look like a star performer if you want the IPO to go well.
- Money: Does your company have enough money to make a successful IPO? This is a confusing consideration because most companies go public to gain more capital, but there are legal fees and accounting fees that can cost your business upwards of $200,000. Can your business afford this type of financial burden? Some IPOs cost businesses more than $25 million. You need to be aware of the cost of this type of process before you start.
- Distraction: Besides having enough money, your company also has to be able to afford the managerial distraction. Can your business run smoothly with distracted managers and administrative personnel for at least six months?
- Commitment: You have to have the right level of commitment. It is best if an IPO happens quickly. The market can turn on companies that have to put their IPO on hold. That means that your business has to be fully committed to going public before you even start the process.
- Scrutiny: After you go public, your company will be in the public eye. When you were private, the majority of people didn’t care how your business fared financially or what sort of executive compensation you were giving out. Now, more people in the public will want to know about your governance practices, management and director performance, share prices and insider trading record. Are you ready for your company to be scrutinized in this way?
- Records: Because of this scrutiny, you have to make sure that your records are all set. Typically an IPO requires that your company have detailed audits for the past three years. This will show potential stockholders the success or failures of your business. You will also have to start preparing quarterly and annual financial reports if you don’t already.
- Control: Typically an IPO causes control of a company to be shifted. Those shareholders who have a majority now will likely lose their majority control. Is your business and are those shareholders okay with this? Are you prepared for your transactional freedom to be limited by the need to get shareholder approval for major decisions? This change of control can be a deal breaker for some private companies.
- Management: Public and private companies require different skill sets from key management because of the increase in task requirements. Before you take your company public, you want to be sure that you have people with experience in key positions in public companies. Your management and administrative personnel will have to effectively promote your company to the public if the IPO is going to be successful.
- Relationships: Your company’s structure, relationships with clients and key contracts will be affected by an IPO. Some contracts will have to be terminated, and you’ll have to change your agreement with certain lenders. Before you take your company public, you have to understand how your relationships will be affected. Review contracts and agreements to make sure that the change isn’t going to adversely affect your company’s profitability.
Before you take your private company public, make sure your business is really ready.
The content on our website is only meant to provide general information and is not legal advice. We make our best efforts to make sure the information is accurate, but we cannot guarantee it. Do not rely on the content as legal advice. For assistance with legal problems or for a legal inquiry please contact you attorney.