IPO vs. private
You might look at the list of some of the country’s huge public companies and think that going public is something you do when you reach a certain size and strength – after all, it’s usually behemoths like Apple and Wells Fargo making the news. But did you know that giants like Staples, Publix and Wawa are privately held? Before you make the public leap, be sure you know all the pros and cons of IPO.
Tony Robbins has founded or been a partner in more than 30 companies, with combined sales of $5 billion per year. Tony knows a thing or two about business success – he’s been on the front lines and knows the benefits of IPO, as well as the disadvantages.
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What does “going public” mean?
“Going public” means a private company is offering its stock for sale to the public for the first time. Also called an “initial public offering (IPO),” it involves bringing in an investment bank to underwrite the company and assume the risk of the sale, as well as a law firm to take care of the public disclosures. It’s often the goal of business owners and entrepreneurs, allowing them to rank with business moguls and raise their company’s profile. It’s the goal of venture capitalists, too. The benefits of IPO to investors are clear: When a company makes their shares public, they’ll make a lot of money off their investment!
Why do companies go public?
The main reason companies go public is to raise capital. If a business is successful, it will command a high price for its shares, which can be a windfall of cash for the owners or partners. Going public is also a solid exit strategy for business owners who have put in the work to build a profitable company and are ready to cash out and buy that beach house or yacht they’ve always dreamed of – or start another successful business.
Pros of going public
The money raised when your company makes an IPO can be useful in many ways: It can be used to pay down debt or for research to help get to that “next level” of product development. Aside from monetary rewards, going public has many other benefits. Once a company is public, it is easier to raise money without having to borrow, because you’ll be able to offer secondary stock offerings to the public. You’ll also be able to use stock to make acquisitions of other companies, so you can diversify your business or absorb the competition.
There are many benefits of IPO in terms of marketing as well. You can use stock options, as well as the simple prestige that comes with being a public company, to attract and retain better talent. IPOs also create publicity for the company, which can help you reach new markets that may not have heard of you before, potentially increasing your market share even further.
Cons of going public
There are a lot of advantages to going public, but there are disadvantages as well. It isn’t an easy process – the Securities and Exchange Commission (SEC) requires compliance with numerous financial reporting laws as outlined in the Securities Exchange Act of 1934. The cost can be high, and fees seem to increase every year. You’ll need to ensure you’re going to get a good price for your shares in order to make up the cost. Another drawback of SEC disclosures is that they can give away your weaknesses to the competition.
The other con of IPO is a loss of independence. When your shares are publicly traded, your company will be more beholden to the market and less able to go in new and innovative directions. Your initial funders may have been venture capitalists, but now they’ve reaped the benefits of IPO to investors, and you’ll have new stakeholders. It can be difficult to focus on your company’s long-term growth when investors want to see results today – and when they have a say in management decisions. The pressure for profits can lead to some risky business decisions, so close oversight is necessary.
Should your company go public?
Like any major decision, there are pros and cons of IPO. If you’re thinking about going public, you’ll want to consult a professional. Work with an investment bank to go through the underwriting process. The firm will evaluate your risk and determine the value of your company – and can also help you consider the pros and cons of going public. You may have heard that $100 million in revenue is the magic number for taking your company public, but you don’t need to be that big. Alternatively, you don’t necessarily have to go public if you are that big.
Some of the typical things that qualify a company to make an IPO are:
- Consistent revenue, with the audited financials to prove it
- The ability to predict future earnings in the range of 25% growth
- A low debt-to-equity ratio – leveraged companies aren’t likely to get a good price
- A strong player in its market, with the potential to keep growing or to enter new markets, and a business plan that lays out how to do so
- A diverse customer base or product offering that is not reliant on a single technology, supplier or distributor
- A solid leadership team that is prepared to go public and enforces good business processes
There is a lot to consider when it comes to going public. You put a lot of work into getting your business to this point, and you’re the only one who can take it to the next level – whether that means an IPO or another strategy. Tony Robbins’ Business Owner Evaluation can help you determine the current state of your company, so you can figure out your next steps.
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