Should my company ‘go public’?

Ways in which the medium-sized private company may benefit from going public

Liquidity and valuation impact

            There are various benefits that come along with a medium-sized company going public. The first would be the liquidity and valuation impact that the company will gain. When this company turns public, it is a requirement that it will be listed in the stock exchange. Any company in the stock exchange has advantages over privately held companies. The annual reports’ information and that which is contained in the IPO prospectus reduces the performance uncertainty thereby increasing the business value of the company (Blowers, Ericksen & Milan, 1995). Listing of the company in the stock exchange increases the company’s liquidity attracting the willing investors.

Private companies rarely have liquidity. Liquidity premiums differ with the economic conditions over time. If a listed company is in the thirty percent range, then it means that if there exists another identical private company, then the listed company is about thirty percent more valued by investors in the market than the private company. The public company would have daily liquidity, where the shareholders will have the knowledge of their holdings more accurately.

Access to alternative capital sources

            The company will also benefit by having an access to alternative capital sources in future. Public companies have the ability to raise more capital if they plan to expand. For the public companies, many can easily be raised at better rates than the private companies. The main reason as to why public companies easily raise money is because they can easily be accessed by the public debt markets. Failure of private companies from being listed makes them difficult to access. Going public improves the debt to equity ratio of a company enabling it to borrow on better terms (Blowers, Ericksen & Milan, 1995).

Motivation of the employees and the management.

            Going public raises the motivation of the employees as well as that of the management. Since the 1990’s in the UK and USA, the use of incentives like the stock bonuses and stock options have attracted and retained most of the management and employees. An observation has been made on the broad spread of ownership and the equity-based awards in the public companies than it has happened in the private companies. The employees and the management become more motivated when they see the results of their efforts in the share price immediately.

            When a private company turns public, the company becomes stronger and substantial. There is a greater press coverage in public companies than in private companies. Such factors leads to recruitment as well as retention employees that are of high quality who always maintain increased sales.

An argument with the same goals achieved if the company remains a privately held entity

            Private companies can still trade their shares just like the public companies do, only that they do not do this in the stock exchange. Private companies trade their shares privately and they have the advantage that they are not obliged to comply with the regulations of the stock exchange like the listed companies. Private companies, unlike public companies, do not have to disclose much financial information (Hass & Pryor, 2009). Private companies can easily be set up since the requirements are not as complex as those of a public company, thereby making it easier to value a private company.

            Going public is not the only way in which the management and the employees can be motivated. A private company can also ensure that its management and employees remain motivated all the time by ensuring that they feel excited being at work daily and they want to spend time with each other. This can be done by creating a pleasant working atmosphere. One of the most known effective ways to motivation is rewarding the outstanding performance of individuals or teams of individuals. Rewarding can be by issuing prizes, pay increments or even promotions. Good relationship between the management and the employees at all levels would also be an effective way to motivate individuals in the private companies.

            Public companies have more organizational structures that raise capital expenses. Private companies are simple in structure and in formation thereby lowering money expenditure. The shareholders in private companies have liabilities limited to their capital investments because of the legal personality nature of the private company. Unlike the public companies, private companies rarely borrow large amounts of money because they do not make large expansions. Private companies are more flexible (Hass & Pryor, 2009). They require less legal formalities as compared to public companies. This flexibility and less formalities reduce the companies’ capital expenses.

Leading financial ratios that will be evaluated to obtain expansion funds

Profitability ratios

            Profitability ratios are important in giving an idea of how likely a company would turn a profit and the relationship of the profit to the other information present on the company. Profitability is an important information that needs to be analyzed when making financial decisions of a company (Elmerraji, 2006). If the company has high revenues but lacks dividends for its investors, then the company has high chances of failure to clear all its costs and expenses. If this company that is going public will be able to make high profits from the stocks and bonds, then less of other sources of capital will be sought for the expansion purposes of the company. If the profit margins are evaluated to be much lower, then it’s better for the company to remain private.

Liquidity ratios

            Liquidity measures how quick the assets of a company can be converted into cash. Liquidity ratios give an idea of how the company is capable of raising cash when it is required to purchase more assets or when repaying its creditors much quicker, either in normal course of business or in an emergency situation (Elmerraji, 2006). When turning public, it will be important to evaluate whether this company will be capable to convert assets to cash quickly for the purposes of the expansion plans underway. Once the evaluation shows that the ratios are lower than expected, then it’s better for the company to remain private.

Solvency ratios

            Solvency ratios are used to show how the company can deal with the long-term financial obligations as well as develop future assets (Elmerraji, 2006). For example, a company with a large debt would be less favorably meet its long-term financial obligations. Solvency ratio is the ratio of total debt to total assets. When evaluating this ratio, other factors such as the age of the company and the type of industry are put into consideration. If this private company is old enough in its industry and has a less ratio, then it will be unable to sustain its long-term obligations in a public sector.

Valuation ratios

            Valuation ratios analyze how a company is attractive to investors. Several measures can be used to determine how expensive or cheap the current stock price of the company is (Elmerraji, 2006). The less expensive the company, the investors are attracted to it. To be able to attract more investors to purchase the bonds or stock, the valuation ratios such as price to earnings ratio will have to be attractive. Failure of the company to have enough individuals purchasing the stocks means that the company will have to remain private because it lacks expansion funds.

SOX compliance surveys

            Given that the financial ratio evaluations suggest that it would be fine for the company to go public, the next big thing would be to ensure that it’s SOX compliance. This would be by following all the SOX sections on compliance. For example, reviewing of all financial reports and ensuring that there are no misrepresentations, representing the financial report fairly and ensuring responsibilities on the internal accounting controls (Sarbanes-oxley-101.com, 2015). All the conditions set by SOX would be met to overcome the possible challenges that public companies face.

            The only disadvantage that I find in SOX compliance are the high initial costs experienced in the internal control mandate. There are so many advantages that the company will experience from SOX compliance, they include gaining more information that would be used in future to assess the effectiveness of the company; there will be an improved internal accounting control and process that will be used for control testing over time.

Recommendation

            Considering that the financial ratios are positive and support the move to go public, I recommend the company to go public. Although the company will not immediately get the funds, there will be much larger benefits later on when expansion of the company begins. To be able to complete a number of the expansion projects ahead, more funds will be required and they will be available only if the company goes public. It would be difficult and strenuous for the company to continue with the expansion projects and still remain private. SOX compliance will help a lot to improve the management and the control of the company when it goes public.

References

Blowers, S., Ericksen, G., & Milan, T. (1995). The Ernst & Young guide to taking your company public. New York: Wiley.

Elmerraji, J. (2006). Analyze Investments Quickly With Ratios. Investopedia. Retrieved 12 October 2015, from http://www.investopedia.com/articles/stocks/06/ratios.asp

Hass, W., & Pryor, S. (2009). What Public Companies Can Learn from Private Equity: Pursue the Value Journey. The Journal Of Private Equity, 12(3), 20-28. http://dx.doi.org/10.3905/jpe.2009.12.3.020

Sarbanes-oxley-101.com,. (2015). Sarbanes Oxley 101: Summary of Major Sections. Retrieved 12 October 2015, from http://www.sarbanes-oxley-101.com/sarbanes-oxley-compliance.htm