Going Public - Living in a Very Expensive Fishbowl
So, you’re thinking of taking your company public. Have you considered what your life, at least your business life, will be like if you work at a public company rather than a private concern? Do the words "fish bowl" carry any meaning for you? Well perhaps they should if you’re looking to take your company public. Not only will your business and its operations be a matter of public interest, the price you pay for the privilege will be pretty hefty.
If the first paragraph of this article makes it seem as if taking your company public is a bad idea, remember, appearances can be deceiving. You are the reason your company is even in the position of considering an initial public offering (IPO), which means you and your advisors are the only people with enough knowledge to make the right decision. The purpose of this article is not really to discourage you from going public, but to arm you with facts that will assist you in doing what is right for you and your company.
Life in the Aquarium
The title of Harvey MacKay’s Swim With the Sharks: Without Being Eaten Alive should vividly remind us all of the sharp competition in whatever industry we operate. It also reminds us of the very real shark pool we enter when we move from a private company to a public company.
No longer will your business decisions be closely held secrets available only to you and your close advisors. As the CEO or other officer of a public company, you will be obliged to give your shareholders a quarterly and annual scorecard of your performance, including an honest discussion of the key decisions made by your management team and how well they worked. If this isn’t enough, you will want to give your shareholders an idea of how well you think the company will do in the future. You do this because you want the company’s stock to be worth as much as possible, but you don’t want to be dishonest.
Don’t worry, you won’t have to give so much information that you jeopardize the company’s future, but your investors are entitled to some idea of the forces that will affect the company in the future. The only problem with this is that much of what you say today may change due to unexpected fluctuations in your business environment as you operate the business.
Each quarter, your life will revolve around at least one momentous event – the conference call announcing your quarterly and annual earnings. In short, this is the time when you as the representative of the company will tell the outside world, including stock analysts and investors, how much the company made or lost in the quarter or year that just ended.
You will have to be careful, without being misleading, about what you say because one measure of your company’s stock value is the price to earnings ratio. Notice the word earnings in the ratio we just mentioned. If your earnings are where the market thought they should be, you likely won’t have a big movement in the value of the stock. If your earnings are better than expected, hopefully your stock value will go up. This sounds good in theory, but caution in telling your tale should be exercised because you don’t want to create unrealistic expectations of your earnings in the future. If your earnings are less than expected or a loss is higher than expected, you will need to choose your words carefully in describing why. Basically, you will want to minimize, without being misleading, the reasons for lower earnings or losses. This is particularly true when the losses come from one-time events.
If the privacy you give up and the information you must disclose is a bit overwhelming, you shouldn’t be too concerned. You will have a highly qualified and expensive team of advisors to help paint the best possible picture of your company’s operating results and its future without being misleading. It will be their job to help you tell people you don’t even know why the company you raised from birth did what it did in any particular quarter or year, but they will charge for their services. How much will they charge? Let’s talk about that next month. In the meantime, have a great February and a wonderful Valentine’s Day.