Think Twice Before Going Public

by: Norm Paquette

This article is a companion piece to my March 29, 2010 post “Why IPO?”

With entrepreneurs once again having dreams of taking their company public and adding more cash into the bank, they should consider carefully the challenges of being a public company.

Once public, the governance structure of the company will require significant change, particularly if it was previously operated by a founder with little outside influence. As a public company, the entrepreneur will be required to establish a board of directors that will include a number of independent board members. Following the establishment of the board, a number of board committees will need to be created including an audit committee and a corporate governance committee. The board and the various committees will typically meet on a quarterly basis to review the financial results and operations of the company.

The financial results for the company, which were private in the past, must now be presented to the world at large including employees, competitors and customers. Each may use this information in different and unexpected ways. Along with the financial results, details of compensation levels for the top executives will also be made public as part of the annual filings with the securities commissions. The CEO and CFO will be required to certify quarterly that the internal controls were efficient and effective during the reporting period.

The filings as a public company will place an added burden on the finance team with the requirement for additional information such as the management discussion and analysis (quarterly and annually), the management information circular (annually) and the annual information form (annually). Filings will also be required for any material change to the business such as a significant contract, mergers and acquisitions, or equity offerings.

Other factors to consider are:

  • The increased insurance costs, particularly if you are listing on a US exchange
  • The challenge of short-term decision-making that may influence the stock price one way as compared to a decision having long-term benefit of the company that could influence the stock price in an opposite way. For example, many public companies are influenced by quarter end boundaries regarding product pricing and discounts
  • The management team, and in particular the CEO and CFO, will be working with a new group of shareholders and analyst who will require more attention and time than in the past.

Becoming a public company has many significant benefits but entrepreneurs need to temper their enthusiasm and carefully consider all aspects of the decision before taking this big step!

Question about this?: Ask Norm

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