There is definitely a sexiness to becoming a public company. The allure is hard to resist. Business owners can proudly watch their ticker symbol glide across screens throughout the financial district. A public company offers several advantages: some which I believe are more superficial, and others that are more practical. 

1. For a company adopting an M&A strategy for growth, using your stock as currency to acquire companies is a huge benefit, as it allows you to save cash. This I believe to be a true benefit, but only if your stock is performing well.
2. In certain industries where your product or service is regarded as a premium product, becoming a public company provides a significant lift in valuation over staying private. We advise on whether this applies to your industry and how to position yourself.
3. The ability to offer stock options to incentivize employees – Private companies can do this as well, but I will admit that the options are more attractive for a public company, as employees in private companies will need to wait for an exit. However, there is a superficiality here that I will address in my next blog with respect to compensation. Spoiler alert: most of your employees don’t give a shit about stock and will not perform better as a result.
4. Influx of retail investors: now this really depends. If you list on one of the larger exchanges and pour a ton of money into investor relations, yes, you absolutely can expand your retail investor base. Having said that, I have seen companies list on smaller exchanges and OTC markets, where the majority of the equity was still controlled by a few key investors and the public float was very small. Then this benefit becomes quite superficial.

Now let’s look at the costs of becoming a public company:

1. Minimum increase of $500,000 in costs on a small exchange and well over $1 million on a larger exchange. Cost include accounting, legal, PR, systems upgrades, and much more staff to handle administration.
2. Massive increase in accounting staff to handle monthly, quarterly and annual reporting. This also impacts every division as more stringent reporting will be required in sales, marketing, operations, etc. where all staff start finding they need to go through a much more onerous administrative process. This leads to lower employee morale.
3. Executives spend much more time drafting, reviewing and approving reports for investors, taking time away from operations.
4. Much greater scrutiny on all transactions, contracts, operations to complete audited financial statements, ballooning accounting and legal expenses.
5. Much more time spent by executives communicating with investors. If the stock falls or the company fails to meet quarterly targets, executives are on the phone addressing these concerns rather than focusing on growing the business.
6. Less flexibility to change business strategies or launch new revenue streams. Investors demand the company meet quarterly targets, which does not afford the flexibility of a long-term strategy that results in poor shot-term profitability.
7. Negative news on your company can be the kiss of death, even it is a rumour. Your stock can easily drop 50% before you even get a chance to defend yourself.

The greatest cost of going public is often a cost that you cannot even see in your financial statements. It is the distraction from investors that take time and focus away from operations. Based on my experience having worked in both private and public companies, it is my personal view that if you do not adopt an M&A strategy for growth, it is not worth going public as the cons simply outweigh the pros. However, the strategy might make sense for either companies that have a stable cash flow with no major plans for major capital expenditures or companies in industries where going public provides a considerable lift in valuation, as mentioned earlier.

I often encourage small businesses to stay private but adopt public company standards. As a private company, it is still beneficial to adopt public company discipline – independent board of directors, issue quarterly financial statements to investors, etc. There is plenty of private equity capital available, as it is easier to attract capital to a well-run private company than it is to a mediocre public company.