What does it mean to go public? Quite simply, going public refers to the process of a company registering shares of its stock with the Securities and Exchange Commission and offering the stock for sale to the public. Most typically, the company engages an underwriter as part of the process, whose job it is to find the buyers for the stock. The process of going public and the consequences of being public, however, are anything but simple.

Reasons for Going Public
Many executives are well aware of the advantages of going public. The increased financial flexibility that follows from having capital at one's disposal is perhaps the most obvious advantage. Lack of funds is almost always an impediment to a private company's growth. Small companies with rapidly expanding businesses need cash. With the infusion of capital from an IPO, the company has working capital to fund the increase in inventory and accounts receivable that accompany sales growth. The company can also develop new products, hire new people, expand existing facilities, increase advertising, move into new markets, retire debt that the owners may have guaranteed, and establish an equity base for future borrowings.

Another significant advantage of being a public company is that the company now has a new tool for recruiting and retaining key personnel - the employee stock option. Of course, stock options are also found in privately owned companies, but the fact that there is an active market in the company's stock makes the public company stock option generally much more desirable. Employee ownership may well enhance an employee's motivation, productivity, and sense of pride and participation.

A third advantage of going public is that the company's owners will achieve greater liquidity for their investment. Going public creates an instant valuation and establishes a market for the stock that hopefully will be sustained. With private companies, to achieve liquidity, the choice often comes down to selling the company outright - which may not be desirable - or to selling a stake to a third party, which is rarely easy. Of course, in going public, the public becomes your partner, under rules of engagement that are set in part by the Securities and Exchange Commission.
A fourth factor to consider is that going public affects the public's perception of the company's stature, stability and competitive position. Whether or not justified or logical, a publicly traded company will often be viewed by its customers as more prestigious and having higher quality products than a comparable private enterprise. In this sense, being public serves as a means of marketing the company's products.
Of course, the hope and desire of every person taking the company public is that all of these factors will tie together to create a vibrant, growing enterprise, where the availability of capital permits revenue and profit growth that leads to higher stock prices and additional wealth for the stockholders.

Considerations in Being a Public Company
Taking the company public requires a significant change in company culture. If the paramount privilege of a private company is being able to say in answer to a question, I'm sorry, we don't disclose that kind of information, the singular characteristic of being a public company is the obligation to disclose information, some of which you really rather not reveal.

Public companies are generally reporting companies, that is, they are required by SEC rules and regulations to file annual, quarterly and big event reports. In addition, public companies generally must issue press releases to further update the public on important developments affecting the company. Reporting companies are also subject to complex rules relating to the solicitation of proxies for the annual election of directors and other stockholder action. Like the initial public offering disclosure document, these various reports will require the company to disclose salaries paid to senior management, transactions between the company and senior management, and the stock ownership of senior management.

The focus of management of a public company is generally different than the focus of management of a privately held company. The realities of public company management is the focus on quarterly results - that is, how do the sales and earnings of this quarter compare with the sales and earnings from the prior year's comparable quarter? If there's not improvement, there's likely to be pressure on management - from the analysts, if the company is followed by the street, or from stockholders, who can express their disappointment by disposing of their stock en masse or in the form of lawsuits. The focus on quarterly results may inhibit management from pursuing projects that require long incubation or significant capital or risk.

Complex restrictions govern public company management's ability to trade in company stock. These restrictions exist largely to prevent trading on inside information. One set of rules makes it most inadvisable to buy and sell company securities within a six month period; the spread, or difference between the purchase and sale price, is company profit that stockholders can demand (and sue for) be returned to the company. A cottage industry exists in lawyers who file these lawsuits on behalf of stockholders. To provide transparency and facilitate the private enforcement of these rules, company management must file reports with the SEC by the 10th day of each month that detail virtually every purchase, sale or other transaction in company stock.

A public company is no longer your company; it is the public's company. Although you may still be running the show, in going public, you will have ceded a large portion of your control of the company to various constituencies. Although the directors of private companies have fiduciary duties to the company's stockholders that may be co-extensive with the fiduciary duties of the directors of a public company, the failings of a public company director to meet these standards will be more visible and, because the public company is typically larger, may have a greater impact. To help ensure that fiduciary duties are met, public companies populate their boards of directors with independent persons who are not employees of the company. The trend is to vest in these independent persons more and more of the decision making power on compensation issues for company management. Decisions that were once yours alone (or with family members) to make when you were a private company must now be shared with outsiders. In certain instances, decision making may be taken away from you entirely.

Is Going Public for You? Many companies are not suitable candidates for going public. Some companies will choose not to go public because of an assessment by the owners that the burdens and responsibilities of being a public company outweigh the benefits. In other cases, you may want to go public but you will not be able to find someone - an underwriter - to take you public (the ways to go public without an underwriter are beyond the scope of this article). The underwriter may tell you that you are not yet ready to go public but that you may be ready in the future. Having said this, the factors that make a company a good candidate for attracting the interest of an underwriter include a great product or service for a large and growing market, or a solid niche market; an attractive gross profit margin, or the ability to create the belief that such a margin will be forthcoming; a sustainable and realistic business model and a strong competitive position; a disciplined and experienced management team; firm internal financial controls; and generally three years of audited financial statements.

Candidates for going public should seek out and develop relationships with investment bankers and SEC lawyers and accountants, each of whom will have insights as to whether your company is right for going public and, if so, will then play a role in taking the company public. In addition, you should seek out and develop relationships with other individuals that have taken their companies public, one of whom you may wish to invite to join your new public company board of directors. You will also want to hear their war stories, and learn what they'd do differently. Chances are, if things went right, they will tell you that going public was a fabulous, defining moment in their lives.

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