OK, Mr. or Ms. Businessperson, now that your business is up and going and things are looking good for its future, it may be time to think about an initial public offering.
But before you get serious about issuing stock with the idea of raising needed capital, a thorough understanding of an IPO is in order, according to Nolan S. Taylor, head of the corporate finance, mergers and acquisitions group in the Salt Lake office of the law firm of LeBoeuf, Lamb, Greene & MacRae, and Thomas R. Taylor, an attorney in the same office.The Taylors (not related) are spreading the word about IPOs and recently held a seminar in conjunction with Price-Waterhouse-Cooper, R. R. Donnelley Financial and Friedman, Billings, Ramsey & Co. Inc.
They liken the journey to an IPO to traveling the freeways in Salt Lake County that are being reconstructed - there are detours and delays, but in the long run if a company would be better off with a public offering the rewards can be great.
Both men stress that "going public" might be a glamorous move in the business world, but it isn't for everybody. Much work needs to be done before you take that big step and plenty of help is needed along the way.
One of the main advantages of going public, of course, is the addition of equity capital into your company, money that can be used for working capital, funding research and development, purchasing equipment, expanding business operations, retiring indebtedness and any other purpose the company deems appropriate, said Nolan.
Other advantages are improved financial position, liquidity, ability to expand through acquisitions, attracting and retaining qualified personnel, prestige and public awareness and elimination of personal guarantees.
As with most things, there are disadvantages. Thomas Taylor said some drawbacks to an IPO are dilution of the holdings of pre-IPO shareholders and substantial expenses for legal and accounting fees, printing costs, filing and registration fees, travel costs, underwriting allowances and commissions.
Other disadvantages are that the company has a loss of flexibility in dealing with certain employees or customers, stock market prices become an indication of the company's value and success, information that previously was private must now be disclosed, the attention of management is diverted during the IPO process, the company and its officers are subject to litigation and periodic reporting is suddenly required.
In addition to the company management serving on the IPO "team," Nolan said the company needs attorneys, independent auditors to audit the company's financial statements, transfer agents and a financial printer. Underwriters either purchase the securities from the company and resell them to the public or offer the securities to the public on the company's behalf. All of the above can be found in Salt Lake City.
After an underwriter is selected, Nolan said it takes 4-6 months for an IPO, depending on how much corporate housecleaning needs to be done and what shape the records are in.
Next, a registration statement and prospectus are prepared, the statement is filed with the Securities and Exchange Commission and comments are bantered back and forth before approval is finally given. This process can take several weeks.
After SEC approval is given, the company management and representatives from the underwriter have a "road show," going to major American cities and sometimes to Europe and talking to money managers and the sales force of major financial brokers. This is when the stock is touted, the management is bragged about and possibilities for the stock are explored.
Nolan said an Ernst & Young study showed that the companies performing the best after an IPO were the ones that prepared to go public, brought in qualified chief executive and chief financial officers, put together the best IPO team and kept their records and statements clean.
Once the IPO is complete, the hard work begins: complying with SEC regulations and keeping the stockholders happy by earning money for them.