When you’ve got the industry blinders on, you begin to trick yourself into believing that a reverse merger or direct public offering is the right solution for 90% or more of businesses either looking to raise capital or experience a liquidity event. Unfortunately in our line of business, this is not always true. The entrepreneurs are not always the ultimate winners. Luckily, when this is the case, we’re typically pretty vocal about telling clients there likely isn’t a fit. Sometimes a non-fit occurs across the business spectrum, from startups to established businesses. Avoiding a “go public” transaction is often a matter of personal opinion of the owners and founders.
Private Means Private
When a company is public–unless it’s taken public on the pink sheets–the amount of disclosure required can be somewhat onerous. Any bad news will need to be disclosed quickly. Such news can effectively tank the value of the stock. That’s part of the risk. Remaining private means, all information remains private. Financials will not be viewed with the same scrutiny. In fact, they’ll not be viewed at all. The difference in cost between both accounting and tax fees on an annual basis between a private and public company can range from $20,000 to $100,000.
If you can find the right PCAOB-compliant accounting firm and legal group to perform your financial and reporting requirements, the cost can be mitigated somewhat, but the cost is still much higher than for a private company. In addition, the cost of investor relations, communication and other legal issues may prove much too taxing for many a private company. There are other fees not typically considered, including those in the initial up-front cost to be listed on the exchange, which isn’t exactly cheap. The upfront cost of going public and the on-going cost can be a deterrent, even if a company can raise $1MM+ from the initial launch.
The legal exposure of a public company is leagues above that of a private business. Ask anyone who’s taken their company public public and who has been sued while managing a public business and they’ll tell you that sometimes it’s not a matter of if, but when and for how much. Additionally, public companies are often exposed to macro market conditions and schemes by market manipulators that can effectively put the company at risk of litigation. In essence, the company remains responsible over things outside it’s immediate control that can come back to bite them later. It’s ultimately never good to be punished for things outside your control. Legal issues in a public company represent the worst arena for this.
The motivations for being public are as varied as the businesses themselves. Deal structure also represents a highly customized fit for each firm. No cookie cutter options exist here. Many a company has made its fortune from doing direct and initial public offerings. But the risks need to be heavily considered before jumping in with both feet. In some cases, going public will be an absolute no-brainer, while in other instances going public may be the answer for someone with no brain. What you choose is often situation dependent as the risks and issues presented above may be immaterial for a company with a specific business plan for growth.