Why Take a Company Public?

And what are the advantages?

Are there any advantages to be gained by establishing your business as a public company? The answer is that there are in fact significant advantages in going public. One of the most important is that going public enables an objective valuation of a company.

When a company goes public, there is a substantial increase in value to its owners/ founding shareholders. In the first place, it is easier to arrive at a reasonably objective valuation for a public company than it is for a private company. That by itself is of value. A company has both tangible and intangible value. Tangible value refers to what the company is worth financially.

There are several ways of determining this. However, the most frequently employed method for a listed company is by its Price to Earnings or P/E ratio, within the context of a company's estimated future growth prospects.

Also known as the multiple, the P/E ratio makes is possible to identify readily how much investors are willing to pay for a company's earning power based on past performance and how much they would likely pay at some future time, when the P/E has been based on projected earnings after it’s expansion plans are put into affect.

Other methods of valuation employed with privately-held companies include the assessment of market value of balance sheet assets; the discounted cash flow method, both of which may also apply to a public company and the capital market comparison method, by which a privately-held company is compared with a public company of a similar size and industry grouping and estimates drawn. These methods all include a level of uncertainty and negotiation between buyer and seller that would not arise under the Price/Earnings approach.

A company's intangible value results from an estimate of the fair market value of assets such as goodwill, customer lists, technical expertise, intellectual property and trade or brand name. In addition, an owner's sentimental value often looms large when trying to arrive at a value for a private company's intangible assets.

According to some Capital Markets strategists, private companies fortunate enough to find a buyer usually sell at 2-3 times earnings while public companies are generally valued at closer to 8-10 times earnings and often much, much higher.

When should a company go public?

The best candidates for going public are companies that have a pattern of growth and can anticipate continued future growth. However, historical growth is not the only route to the capital markets. If a start-up can win investors' confidence by virtue of the integrity of its promoters, the known skills or calibre of its management team or by the anticipated success of its business approach and its products, then the market can accommodate such a start-up."

"Preparedness is the key to becoming a public company". A company must be prepared to be transparent, it must be prepared to keep the investing public informed and above all, its accounts must be accurate, up-to-date and in place."

When the necessary groundwork is in place, the best time to go public is when the investors are likely to be interested. This would coincide with periods of heightened public interest in the stock market for example, during a bull market. The required planning and preparation should also precede a public offering. Perhaps the most important pre-condition for going public, is that the company's founders and owners must take a decision that their future, their company's future and the nation's future can best be served by sharing ownership with the public.

There is a view that when companies share ownership through public offerings, that this encourages their own customers to save and invest, thereby assisting them to participate in the process of wealth creation and economic growth. While the requirements for going public are exacting and require higher standards of disclosure and transparency, the company will be better off in the long run. The company's ability to compete and expand will be enhanced through its improved management practices and its strengthened capital structure. As a result, the company will enjoy greater confidence among policymakers and the general public.

Going public is not only a pivotal step in a company's growth strategy. It also provides a foundation for long-term management succession and for a planned exit strategy for the owners and seed capital investors by cashing out portions of their interest over time. This is the important point about going public. It must be part of a long-term view, a vision of future success. Immediate benefits include the fact that the company gains prestige in the public view and that its market determined value is displayed regularly.

SUMMARY BENEFITS - GOING PUBLIC

There are many reasons why owners or managers of the company may want to take it public. Among major advantages of being a public entity are:

Liquidity and mobility of capital. The shares of the public company can be bought and sold in the open market (listed Company) or through the Company’s share registry via private treaty (Un-listed Company). There is rarely a market for shares of a private company. In comparison the capital invested in shares of a public company can be more easily channelled to the markets where returns are higher.

Higher company valuation resulting from significantly higher share price. Indeed, since liquidity has value, it is natural that shares of a public entity are worth more than those of an identical private company. It is worth mentioning that in certain circumstances the liquidity discount may be as high as 60%.

Significantly greater access to capital. Not only can a public company can raise money via a stock offering, it also may consider bonds or convertible bond issues thus structuring its capital in the most favourable way. The later usually warrants better bank financing terms and lower cost of capital in general.

Ability to grow via mergers and acquisitions financed by the sale of a percentage of the company's stock. Since public companies may raise additional cash through numerous offerings, they are generally better positioned to finance cash acquisitions. Alternatively, public companies may finance acquisitions with their stock as opposed to cash or a mixture of both.

Ability to attract and retain talent via use of stock incentive plans. Management and employee can be offered participation in the equity of the company via stock-options plans and other stock incentive plans. These plans are usually designed in a way that rewards long-term commitment to the company.

Flexibility in personal financial planning and exit strategies. Liquidity of the stock of public companies provides shareholders with greater flexibility in their financial planning. The stock can be more readily sold, bought or offered as collateral. Business owners, founding shareholders or early investors in the company usually find going public to be an excellent strategy. Multiple rounds of funding at increased variance of share issue price also offer excellent and profitable exit strategies.

The valuable status of the publicly traded company results in a much greater exposure and media coverage of the company, its stock and products.