In Part 4 of our multi-part series on managing your MSP’s money, we talked about how to raise money for your business by soliciting private investors. This time, we’re going to examine the advantages, disadvantages, pitfalls, payoffs and process of “going public” – putting the company’s stock up for sale to the general public and trading on the public stock exchange.
Evolving your business structure
Your MSP might have begun as a sole proprietorship or a partnership, since those are the simplest ways to structure a business for tax and legal purposes. Or you might have created – either at the beginning or later as your company grew – a limited liability company (LLC), which is popular because it offers some of the same legal protections as a corporation with less cost and “hassle factor” to set up and maintain.
But if you’re at the point of considering going public, your company is most likely already incorporated. Corporations are very formal structures that are recognized as independent entities (and in some cases, treated as “persons” separate from their owners under law). Corporations operate under complex rules and must adhere to a set of Bylaws that are filed with their Articles of Incorporation.
For profit corporations issue stock, which is divided into shares, which represent slices of ownership of the company. Those who own shares are the company’s stockholders. Shares can be sold, given or otherwise transferred from one person to another.
Privately held corporations are owned by a small group of people or even just one person. Stock is sold only to those invited by existing shareholders. A public corporation’s stock is available to anyone who wants to buy it. There are no size limits, either way. Some small corporations are publicly traded and some large ones (such as Toys R Us, Enterprise Rent-a-Car and Publix Supermarkets) are privately held.
The big step: Going public
Why go public? Why give up control of your company by opening it up to shareholders you don’t know? Generally, companies do it to raise money. If you have a product or service that’s hot and/or you’ve made a name for yourself, you might be able to raise a very large amount of money. However, it’s not a decision to be taken lightly. Going public can be a costly process and your company incurs many obligations; failure to comply with the rules can result in disaster.
Advantages and disadvantages
In addition to the money that you raise from selling the stock, being a public company may make your business more attractive to lenders so that you can get additional money more easily and at better rates. Companies often experience an increased growth rate after the IPO. Going public may also help attract more highly qualified/high profile employees, and your company can offer stock options as an employee benefit. An IPO may also be the “end game” for the company founder or a venture capitalist who is ready to cash in on his/her investment.
It’s not as simple as filing a few forms, though. It can cost hundreds of thousands of dollars to go through the IPO process, what with the legal fees, accounting fees, filing fees, printing costs, etc. And of course, it doesn’t end after the IPO; the company will have the ongoing costs of complying with SEC regulations.
In addition to the monetary cost, there is a privacy cost; the company will have to disclose a lot of information (including the company’s financial particulars, the salaries and other compensation of top employees, and general business plans) that its officers might prefer to remain private. All of that information will be available to your customers and competitors as well as your investors. Publicly traded companies must file annual reports (called a K-10) that disclose many details about the company, its finances, and its business plans.
There are also the restrictions on trading company stock that apply to company managers and board members and there is also the risk of accusations of insider trading as well as other risks of liability for corporate officers that didn’t exist when the company was private.
How it’s done
In the United States, a company makes the transition from privately held to publicly held corporation by registering an initial public offering (IPO). What this means is that you have to file a statement (S-1 form) with the Security Exchange Commission (SEC). The statement includes information about your business and its financial condition. It includes a prospectus that is available to potential investors. You can’t sell shares publicly on the market until this documentation is approved by the SEC.
There are simplified versions of the form for companies that qualify as “small businesses,” which in this case means less than $25 million in revenues/stock value. The simplest is form (SB-1) if you are looking to raise $10 million or less.
Your company doesn’t have to be a huge multi-national corporation to go public. The company doesn’t have to have been in business for a long time and only one or more full time employees are required. The company does have to be incorporated. You have to get an SEC-approved audit and secure at least 40 shareholders. Here is a more detailed list of requirements.