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Should You Go Public?

For many entrepreneurs, a successful IPO represents the pot of gold at the end of the rainbow. It provides an opportunity to unlock all of the value and "sweat equity" that has been created through years of hardship and deprivation. It can mean access to the precious capital that is so critical to the growth of a small business. And for many, an IPO is seen as the most tangible and telling evidence of the success of their venture.

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Stories of small-time boot-strappers scoring big in massively valued IPO's abound. It is no secret that a well-orchestrated IPO can lead to impressive wealth. What is not as well-publicized, is the fact that going public has more than its fair share of risks and headaches. So, before making the decision to undertake an IPO, take the time to weigh the advantages and disadvantages of going public. Consider very carefully whether transforming your company from a tightly controlled private company into a highly scrutinized and regulated public company is really the best thing for your business.

Advantages of Going Public

1. Increased access to capital. This is probably the most important factor in the decision to go public. Capital will provide the means for you to expand your operation quickly and build a dominant market presence.

2. Increased liquidity. Going public will create a measure of liquidity for your firm's stock that is generally unavailable for most small private companies. This liquidity will allow you to sell a portion of your own stock (subject to SEC regulations) and diversify your own asset holdings. It will also allow you to issue marketable stock options to key employees as an incentive for their continued loyalty to your firm.

3. Ongoing access to capital markets. Once your company is publicly traded, you will generally find it easier to find willing investors to provide either debt of equity funding for your business (assuming that your company is doing well).

4. Increased employee retention and productivity. As a publicly traded company you will find it much easier to attract and keep the quality talent that will be so vital to the success of your business. This will be particularly important as you experience rapid growth. The ability to issue marketable stock options to key employees as a sign-on bonus or as a loyalty incentive can confer a significant competitive advantage on firms whose stock is publicly traded. This is particularly true when the labor market is tight.

5. Creation of personal wealth. A successful public offering has the potential to significantly increase your personal wealth. While the obstacles and headaches may sometimes seem insurmountable, the payoff can be enormous.

6. Less equity dilution. As a general rule, public offerings tend to preserve more of the equity in the business for its founders than private placements and other forms of equity financing. This is because a public offering is more widely advertised than private placements. Market competition results in a more equitable distribution of stock relative to value.

7. Improved financial position. The proceeds from a successful public offering will have an immediate and dramatic positive impact on your balance sheet. Your debt to equity ratio will decrease and your liquidity will improve. You may also become a better credit risk for prospective lenders.

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Disadvantages of Going Public

1. Disclosure requirements. As a public company, you will be required to disclose detailed financial and operational information to the general public. Sensitive information regarding sales, profitability, and salaries of officers and directors will become a matter of public record. Customers, competitors, employees, and others will be able to freely access and peruse information that was once closely guarded.

2. Continuous profit pressure. Public companies quickly find that they must continually strive to maximize shareholder value. The capital that shareholders entrust to your company will come at a high emotional price. As shareholders seek to maximize the return on their investment, they will demand higher and higher levels of profit - each quarter and each year - into perpetuity. These unrelenting profit expectations can quickly become onerous. Running a public company is not for the faint of heart. It requires a tremendous amount of maturity, patience, political acumen and a great deal of hard work and focus. Managing shareholder expectations and delivering an acceptable performance on a consistent basis can be extremely stressful. Sometimes these shareholder demands will result in poor management decisions as short-term profits take precedence over long-term investment decisions.

3. Onerous reporting requirements. As a public company you will be required to report on your financial performance to satisfy the SEC and your shareholders. Because your shareholders will generally not be involved in the day-to-day management of the company, they will pay very close attention to these financial reports. Consequently, the preparation and presentation of quarterly and annual financial and operating statistics and trends will consume an inordinate amount of senior management time and attention. Indeed, these reporting sessions can become quite distracting.

4. Loss of control. As the principle shareholder of a privately held company you enjoy a great deal of control over strategic and operating decisions, financial expenditures, and company growth. However, as soon as you take your company into the public domain, this freedom and control is severely diminished. New stakeholders in the public entity will want to ensure that their interests are protected. They will demand representation on the board of directors where they will be in a position to exercise significant influence over corporate decisions. If your equity stake becomes sufficiently diluted over the course of time, you may find yourself on the outside looking in - particularly if the company's performance is not consistently meeting expectations.

5. Going public is costly. There are significant costs associated with a public offering. These up-front costs include fees to underwriters, attorneys, and accountants as well as significant printing fees. In addition to these initial expenses, you will be faced the ongoing expense of producing and distributing quarterly and annual reports to shareholders and regulatory agencies.

Are You Ready to Go Public?

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