Going public can provide economic boost to companies

Determining whether a company is ready to enter the publicly traded market is a process of multiple steps. The first step, according to Steve Blumreich, president and managing director of BKD Financial, is to determine if going public is the best way to meet the company's needs.

Going public isn't for all companies. There are advantages and disadvantages to sharing a business with the world.

Advantages

Becoming a public company provides greater access to capital the No. 1 reason for going public. John Gott, president and chief executive officer of SLS International, which became a public company in June 2001, agrees: "We had developed a new technology with a potential worldwide market, and we needed the capital to develop it." SLS International, a loudspeaker manufacturer located at 3119-A S. Scenic Ave., is traded over the counter as SITI.

Decorize Inc. also needed the additional capital to keep up and continue to grow, said Jon Baker, chief executive officer. Decorize Inc., located at 2111 Union Ave., Unit F, went public in June 2001 and is now traded on the American Stock Exchange as DCZ.

Growth is not only made possible by the fresh capital but also by the credibility, prestige, and value which accompany a business,' public status.

That value makes obtaining financing for expansion or acquisitions more accessible. Companies also can pledge stock rather than taking out high-interest loans.

Stock options, bonuses and other incentives for employees are added benefits. The incentives a public company can offer are an effective tool in attracting and keeping highly qualified personnel.

Going public also opens up possibilities for owners to diversify, whether their goal is retirement or to set up a general exit strategy.

Disadvantages

There are several responsibilities that go with being a public company, including adhering to strict regulations and reporting procedures. Shareholders must be kept informed about the company's business operations, financial condition and management. Rather than owners being accountable only to themselves, Gott said, "You've got 5,000 owners you don't know."

Owners also face pressure to maintain steady growth, since stock prices are based on earnings.

One other drawback is that the process of making a public offering takes time and money.

Gott said SLS's transition took a total of three years because it gave a clean offering and went through two years of financial audits.

Decorize Inc., however, was trading on the stock market in about four months. The average time for going public, according to Blumreich, is six to nine months.

But the investment of time doesn't end there. "About half of my day is spent dealing with stock matters," Gott said.

Assessment

Blumreich advises companies interested in transitioning to public wonership to start by assessing their objectives to see if going public is the best solution.

If the owners of a family business want liquidity so they can retire, for example, Blumreich said there may be better ways to accomplish that goal.

Once a company decides that going public is a desired step, it's time to evaluate if the business can demonstrate the stability and promise expected of a public company.

Global Business Resources Inc. identifies six requirements:

Good fundamentals (i.e., strong management, a creditable balance sheet, good sales growth, good earnings trend, etc.);

Glamour, or the potential for exceptional growth;

A capital structure and stock price which is acceptable to the investment community;

Trading liquidity;

A company which meets all the regulatory requirements (preferably one which qualifies for a NASDAQ listing);

A well-conceived and dedicated stock promotional effort.

Not every company that goes public is on the NASDAQ. SLS started with a small offering of $1 million and is working toward a NASDAQ qualification in the next three to six months.

Going public

While large, multimillion-dollar companies are often good candidates for traditional initial public offerings (IPOs) there are options for companies of all sizes. Smaller businesses often can take advantage of special exemptions the Securities Exchange Commission has designed to help them break through to the public market.

There are two methods of taking a company public. The reverse merger, often preferred by smaller businesses, is a faster, less expensive process in which a firm steps into a public shell no longer being used by its original company.

The traditional IPO is more expensive and difficult, but it is preferred by many companies because it offers a clean start and a bigger splash in the market.

Whichever path a company takes, owners should be prepared for some extra work. A business must provide a registration statement to the SEC. After the SEC declares the statement effective, a company can begin offering securities.

Owners and underwriters usually follow this up with "road shows" to announce and promote the company to stock brokers, who then sell the stock to public investors.