Tally the Pros and Cons of Going Public

For many business owners, going public is the pinnacle of success. But the process is rigorous, requires enormous effort and time, and can be extremely expensive.

Leading up to the day your business goes public, you need to engage an investment banker, build a successful IPO team, avoid some pitfalls and be ready to meet the stringent requirements of a publicly owned corporation. The process is rigorous, requires enormous effort and time, and can be extremely expensive.

Going public is not for everyone, but if your company is set on it, carefully consider the pros and cons.

Terms You Need to Know Here are some of the other terms you will hear during an initial public offering: Aftermarket performance. The difference between a stock’s initial offering price and its market price. Expression of interest. A firm and obligated order to buy a specific number of shares. Greenshoe. An agreement that the underwriter may authorize more shares for distribution if demand for an offering is high. Oversubscribed. The spread between demand and supply for an issue. If an issue is four times oversubscribed, expressions of interest are four times greater than the amount of stock available. Pricing date. The day underwriters determine the final price, yield, and size of an offering. Selling group. A group of dealers the lead underwriter appoints to market a new or secondary issue. Members may or may not be a part of the underwriting group. Syndicate. A group of investment dealers who underwrite and distribute a new issue of securities.

Time, Expense and Wary Investors

First you need a clear idea why you want to sell stock on the public market. Among the benefits:

• Raising money for growth and expansion without taking on additional debt.
• Providing liquidity for shareholders. Bear in mind the securities exchanges and underwriters generally want principal holders to stay with the company for a certain period of time, during which their shares typically are in escrow and released over time. Moreover, company officers and senior executives have access to material information and cannot trade shares until that information is made public.
• Increasing stockholder value. Publicly traded shares generally trade at higher prices than holders can demand in private transactions.
• Boosting your company’s profile and reputation. However, while an increased profile can help raise more capital, the spotlight can also attract hostile bidders that eventually could result in a loss of control of your business.
• Acquiring shares for stock option incentives to attract and retain skilled employees or to use in place of cash to make acquisitions.
• Increasing liquidity for a succession plan if family and associates don’t have the money to purchase your stock.

But having a reason to go public isn’t enough. Your company must be ready to face investors, who generally scrutinize three factors:

1. Earnings: Investors buy into potential growth and want to see a strong record of good returns on sales and assets. If you have been adjusting your earnings for the best tax benefits, you may have to restructure your business and restate earnings. Carefully review potential tax reorganizations and individual tax consequences with your accountants.

2. Business Plan: Having a business plan helps gauge the soundness of your intention to go public. It also helps write the prospectus that investors need to evaluate your offering. The business plan should include a market analysis, a description of your company’s products and services, management structure, and financial information and projections.

3. Management: Investors want to know you have an expert management team that can carry out your business plan. Investor reaction to both your prospectus and your management team can play a large role in determining the valuation of your company and the pricing of the stock issue. As well, you need a strong board of directors that understands your industry and reflects a varied business background. The board will be accountable to all shareholders for overseeing the operations of your public company and must consider their rights in all major business decisions.

Examine the Drawbacks

Finally, you want to discuss with your advisers the potential disadvantages to ensure they don’t outweigh the advantages. Among the drawbacks:

• Financial Costs: Going public is expensive, and among the costs that can quickly add up are: Underwriting fees can range as high as 15 per cent;

• Legal and accounting fees, as well as printing, listing and registration costs can add up to as much as four per cent; and

• Continuing costs that include annual reports, board and shareholder meetings, shareholder registrations and transfer, and publishing disclosure information.

• Time Costs: Typically, preparing to go public can take one to two years and eat up as much as 50 per cent of managers’ time. This can distract them from the efficient running of your business and can lead to lost opportunities.

Public companies must follow stringent, expensive, and time-consuming reporting and filing requirements. Some of the information you make public could be sensitive and you must disclose any information that can affect an investor’s decisions. You may have to spend a considerable amount to upgrade your accounting and information systems to handle the volume and variety of information required. Regulatory compliance can add from $25,000 to $200,000 in expenses.

Phase Two

But getting your business in shape for an initial public offering (IPO) is just half the battle. Once everyone involved determines you are ready, phase two begins.

While starting work on your prospectus, you must choose a lead underwriter, then file the prospectus and amend it if any of the appropriate securities commissions have concerns. And then you take the show on the road to market the offering.

The process is complex and time consuming, but the success of your IPO depends on it

The underwriter is typically an investment bank and acts as agent for the IPO. The roll is central to your offering so choose carefully. Get recommendations from your lawyers and accountants as well as others who have gone public. Check references thoroughly.

Among the qualities to look for in an underwriter are:

• Reputation in your industry.
• Availability of experienced analysts.
• Existing relationships with your current and future customers, suppliers and competitors.
• Chemistry with you and your management team.
• Ability to provide after-market support.

Working with the underwriter you will determine the amount you want to raise and the number and types of securities you want to issue. The structure of the offering is typically one of two scenarios:

1. A firm commitment, where the underwriter guarantees to raise a certain amount by buying the entire offer and then reselling to the public, and
2. A best efforts agreement where the underwriter sells shares but doesn’t guarantee an amount.

Writing and Filing the Prospectus

Your prospectus serves two purposes: compliance with legal disclosure requirements and acting as the main marketing tool for your offering.

Your lawyer, managers, advisors and underwriters will work together to compile documentation about your company and its holdings, its capitalization, risk factors associated with the offering, a description of how the offering is structured, and a due diligence report.

You file the prospectus with securities regulators in each of the provinces where you plan to offer the shares. The more provinces you choose the higher your costs but the broader the exposure of your offering. Filing in Quebec will require English and French versions of the prospectus.

The regulators review the documents and issue comment letters with concerns they expect you to address, usually by modifying the prospectus. When regulators are satisfied, they will ask for a final prospectus and issue a receipt. You are then officially a reporting issuer and may start selling the shares.

The Quiet Period and Road Show

The time between filing the preliminary prospectus and getting the receipt for the final prospectus is the “quiet period” when you can market your offering only through oral statements and the preliminary prospectus. You must ensure that you do not issue any press releases, written presentations or other material that would be classified as advertising and that hypes the offering.

However, you can begin your road show, where you generally meet with two types of investment professionals:

1. Buy-side analysts and fund managers working for mutual funds, insurance companies, and large investment groups looking for investments where they can put some of their pool of money, and
2. Sell-side professionals who are usually brokers with retail investment houses looking for investments to recommend to their clients.

When the road show is over and you have distributed the final prospectus, the underwriter will set the final offering price and size.

The pricing will try to balance your need for cash with investors’ desire for investment gains. Your underwriter may recommend reducing the size of the offering if interest appears to be waning or increasing it in the face of strong demand. It is unusual to postpone an IPO due to lack of interest.

Once the sale is complete, you are a public company and subject to all the disclosure laws and regulations and responsible for your shareholders’ best interests.