Going public is the process of offering equity - shares, partnership units, trust units and so on - of a privately owned company to the general public. As the name suggests, the initial public offering (IPO) is the company's first such offering.
Successful offerings are the result of solid planning and preparation. Ideally, a public offering should be part of a strategic plan that is implemented over the course of three to five years, although offerings can and do happen within a shorter time frame.
The Guide to Going Public provides information on the three distinct stages of an initial public offering. These include:
It also includes a section describing the process of going public in the United States.
Preparing to go Public
The first stage of going public is deciding whether it's the right move for your company. Since the process requires a great deal of planning and financial and human resources, you should ensure that the advantages outweigh the disadvantages.
Careful consideration of the advantages
Going public can provide you with access to long-term capital, increase your market value, position you for financing growth and better position you for negotiating an acquisition or merger. The initial public offering process can also help you gain visibility and provide a greater sense of security for potential suppliers and customers who may perceive your public company status as a positive reflection of your financial affairs. If you are a business owner, going public can increase the liquidity of your assets by enabling you to sell shares in the IPO or at a later date. Finally, public offerings also enable you to develop stock option plans that can be an advantage in attracting and keeping talented personnel.
Careful consideration of the disadvantages
Because going public is essentially a one-way process, it's important to carefully examine the disadvantages as well. It is difficult and costly to take a public company private again, so in some cases the disadvantages may lead you to decide that going public is not the right step to take. An initial public offering also costs a great deal. Although you'll recover your costs if the offering is successful, there is no guarantee of success.
A public offering also requires a lot of time. In addition to the planning and preparation time, other time demands include taking the time to respond to investor inquiries, to make presentations to the investment community, and to write, print and distribute quarterly and annual reports. Furthermore, increased communication and disclosure requirements mean that the details of your company's business, operations and finances are open to public scrutiny and to your competitors.
There will also be implications on your decision making and accountability. Executives of public companies cannot make all decisions unilaterally or on an immediate basis. Instead, they may need the approval of their board of directors or shareholders on certain issues. As a public company executive, you will also be accountable to the shareholders for the performance of the company.
The costs
There are costs associated with each of the three stages of going public. First there are costs involved in getting the company into public shape. Then there are the costs of the offering itself. Finally, there are ongoing costs of administration and reporting.
Preparing to go public
During this stage, you can expect to pay audit and accounting fees, legal fees, salaries for possible additions to your management team, and directors' fees for a strong, independent board.
The offering stage
The largest single cost during a public offering are the underwriters' fees, which can range from 6 to 10 percent of the gross proceeds of the offering. In addition, you can expect audit and accounting fees, legal fees, printing costs, the cost of a road show and miscellaneous expenses.
Complying as a public company
The costs to comply as a public company include all annual administrative and investor relations costs.
The First Steps
A solid business plan is one of your most valuable tools. Your business plan will contain much of the information that will be useful in drafting the prospectus - which in turn becomes the basis for the story you'll take to the marketplace.
Your business plan should tell your company's story, including how it makes money, the general development of the company and where it's headed. It should describe your distinctive competencies, provide a market analysis, market strategy, profile of your management, financial statements and provide a description of your operations, product performance and potential.
The last stages of preparation will require you to start acting and looking like a public company. You'll also need to take care of the final promotional and organizational details of the initial public offering.
1. Getting your house in order
As you work through the business plan, you will identify areas requiring your attention.
2. Managing like a public company
Public companies have a management structure with clear lines of authority, a strong and independent board of directors and a committee structure to comply with corporate governance rules set out by the securities exchange. You will need to make whatever changes necessary to operate along similar lines.
3. Developing a public profile
Not only do you need a compelling story to capture public attention and interest, you need it to generate the kind of interest that will make people want to invest in your company.
4. Establish key professional relationships
It is very important to have well-established relationships with your professional advisors. When putting your team together, consider three fundamentals: rapport, reputation and response.
- Rapport - You need to get along with your advisors.
- Reputation - You want professionals of the highest integrity who are known for quality work.
- Response - You should expect quick and responsive action.
Choosing lawyers, auditors/business advisors and underwriters is an important step. For each of these positions you will want to look for particular skills and competencies to ensure that you pull the best team together to help you through the process. The selection of an underwriter is a particularly critical part of the planning for your public offering. You will need an underwriter with a highly developed sense of what sells, an instinct for timing and the savvy to anticipate pitfalls and calculate risks.
5. Considering the alternatives to going public.
If your company is not ready or if market conditions are not quite right, it may make more sense to look at interim or bridge financing. Part of your evaluation should involve taking a look at alternative financing options and weighing their pros and cons. These alternatives may include:
- Commercial loans;
- Venture capital;
- Private placements;
- Joint venture and partnerships;
- Selling the company; and
- Reverse takeover or merger.
6. Timing the markets
Once you're ready to go, you need to time your debut. Assessing the state of the markets and determining the right timing for your company to raise capital is more art than science. Consult with your underwriter on a regular basis and follow the performance of companies in your industry or market to help develop judgement about your company's prospects. Be prepared to move quickly when the time is right.
The Initial Public Offering
The process of the offering phase is a period of juggling several different projects simultaneously. In addition to preparing the prospectus and undergoing due diligence, you must monitor market conditions for pricing purposes, prepare for the marketing of the IPO and continue to run your business. This all happens within a tight time frame of approximately 100 days.
1. Preparing the prospectus
The prospectus is a document that provides the necessary information to allow investors to make reasoned and informed decisions. It includes the history of your company and outlines future prospects and risks associated with the investment. Since you know your business best, you should be sure to take a lead role in the preparation of this document.
2. Undergoing due diligence
Due diligence is the process where the lead underwriters and their lawyers conduct a thorough investigation of all aspects of your business. The process is primarily carried out over the first 60 days. The underwriters' lawyers will compile a thorough request list for documents pertaining to the company. In addition, the underwriters' lawyers will prepare a questionnaire for the officers and directors of the company. They will make a close inspection of your facilities to inspect your material assets and will verify your list of employees and your benefits plans. Shortly before the preparation of the final prospectus, your working group of advisors will hold a meeting to update the due diligence. This gives all parties an opportunity to ask questions and to establish due diligence defenses.
3. Monitoring market conditions
Throughout the offering period, the underwriters are testing the waters in terms of pricing and market acceptance. Although the underwriters usually recommend the final price and offering size, there is always room for negotiation. As such, you should monitor market conditions in order to help you negotiate the final pricing decision.
4. Marketing the IPO
While these other activities are going on, you'll need to think about how to present your story to potential investors. Once you have finalized your preliminary prospectus, your key executives and your lead underwriter will undertake a whirlwind tour known as the road show - a series of presentations to the investment community that typically takes place in a number of different cities over a two-week period. This is the core of the selling effort. The greater the interest you build, the higher the expected pricing or market value of your company.
Life as a Public Company
As a public company, decision making can become more complicated -- because your business decisions will have a direct impact on the value of the company's securities. It can also be difficult to get accustomed to learning to operate within a more structured environment where you can no longer make all the decisions alone. Expect a steep learning curve as CEO.
Your plan of action should strive to:
- Add shareholder value by continuing to grow;
- Project a positive image to investors, customers and the general public; and
- Maintain innovation and commitment at the management level.
Going Public in the United States
This section of the guide is an overview of what is involved in taking a Canadian company public in the United States and why you may want to consider this alternative.
Canadian companies often consider this option because it can offer access to more capital and increased trading volume in the shares of your company. The attraction for Canadian companies may also be increased visibility. If your company meets the right criteria, you may be ready for a public offering in the U.S. and a listing on a major stock exchange. However, you should be aware that the process of taking a Canadian company public in the U.S. is complex and will require you to selectively choose advisors with a solid understanding of the issues and requirements.
For a full text version of The Guide to Going Public, select the Adobe Acrobat file below.
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