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7 Reasons Not To Go Public September 6, 2010

Posted by Ian in Uncategorized.
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For those who knows me, I have been managing my little company for slightly over 10 years now. And all these years, there is only one investor in my company, myself. I went through the “normal” path of spending countless hours and funds to make sure that this little venture of mine gets off the ground.

Keeping the operation small has always been in my agenda. Some may argue that that is not the way to run a business. Quite a few suggested that I should grow the business, go public and sell it off. While all those may sound good in the big picture, but handling the daily operations may not always be so straightforward. Then again, here are the 7 main points:

– No. 7: You will live life in a fishbowl.
Publicly held firms must file quarterly financial reports with the U.S. Securities and Exchange Commission. They must also disclose the salaries and stock and option holdings of key officers. You may (read: will) get nasty e-mails from investors who think you aren’t worth your paycheck. Get caught having an affair? You’ll probably read about it in the paper. (Ask Mark Hurd at Hewlett-Packard — and thanks to those SEC filings, his spouse’s attorney has a pretty good idea what he makes, too.)

– No 6: Stock prices fluctuate.
Generally speaking, as profits go, so do stock prices. Increase your earnings per share at a slow and steady rate and your stock chart will slope nicely up and to the right.

Two problems. First, earnings don’t always grow slow and steady—if they do, look for some accounting chicanery—and when they gyrate, your company’s stock will gyrate. Second, even though your company may be putting up strong numbers, its stock might still get hammered if the overall economy sours. A flagging stock price can crush morale, especially if a lot of your employees own company shares in their retirement accounts like CPF (Singapore) 401(k)s (USA).

– No. 5: Loss of control.
If the shares fall too low, someone else may just buy up enough shares and kick you out. That’s the price you pay for using other people’s money.

– No. 4: Fewer trade secrets.
Given all the disclosures, competitors will know a lot about your pricing, margins, profitability and financial structure. From that data they can extrapolate your weaknesses and exploit them. If your competitors are privately held, that imbalance of information could be a severe handicap.

– No. 3: The tyranny of quarterly targets.
Whether you like it or not, investors and analysts will expect you to predict how your company will perform in the coming quarters. Whatever numbers you do give, you better meet them, because the market hates surprises. If you don’t give “guidance,” analysts will publish their own forecasts, which could move the market for your shares considerably. If not enough analysts follow your company, penny-stock scammers might have a field day manipulating your shares.

There’s an even more pernicious problem here: Pleasing analysts may lead you to make decisions that yield good short-term results at the expense of a better long-term strategy. You may think you can stand firm, but you would be one of the few who can. But that is no way to run a growing company.

– No. 2: Financial costs.
Going public is neither cheap nor easy. There are too many accountants, lawyers, bankers and information purveyors who want a piece of the pie. The Sarbanes-Oxley Act of 2002–in response to a slew of accounting scandals (Enron, Tyco and WorldCom)–added to the paperwork pile.

The tab to take a company public ranges from $1 million to several million–and that’s on top of underwriting fees, perhaps 7% of the total offering, charged by investment bankers to drum up institutional buyers for the shares. Ongoing compliance costs: about $250,000 per year. Of course you’ll need an investor relations department to deal with those pesky analysts, and officers’ insurance for qualified people who sit on your board.

– No. 1: The loss of your most precious resource.
Once upon a time you were focused on making your company the best it could be. As head of a publicly traded entity, you will be forced to divide your time between minding the shop and romancing the public markets. Maybe your company doesn’t need you to play caretaker.

Then again, for many growing companies, that’s an awfully big maybe.

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Comments»

1. Harro - September 7, 2010

Singapore has a very short view of financials. If you can sell a company above the cost of creating it, you’ve reached a key goal.

For many people, what do you do after selling your first company? Typically they move on to the next one.


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