Going Public: Do benefits outweigh disadvantages?
Smart Business, interviewed by Denise T. Ward
October 20, 2006
 It has never been considered easy for private companies to sell a piece of their business to the general public. Numerous regulatory steps are involved, and immense financial obligations may be required. Since 2002, more regulations have caused companies to take a closer look at “going public.”
Wayne Pinnell, CPA and managing partner
of Haskell & White LLP, reports that
even with the increased regulatory environment,
more companies filed initial public
offerings during the first half of 2006
than in 2005.
“Part of this increase, I believe, is because
business owners are starting to become
more comfortable with the regulatory environment,
and have grown more assured with
a stronger economy this past year, as compared
to the previous year,” Pinnell says.
Smart Business spoke to Pinnell to
cover the primary steps of going public,
and why it is vital for business owners to
carefully take this major step into the
unknown.
What does a company gain by going public?
The first reason, of course, is to raise
equity, which allows the company to have
another source of financing beyond the
money it raises in its initial public offering.
As a public company, the business can use
more freely tradable securities as a form of
currency to conduct other transactions.
For example, once public, a company can
utilize its stock book, instead of only a
checkbook, to spur growth by buying other
companies.
The second reason is related to the succession
or an ownership transition plan.
Founders of the business can cash out and
move on to future endeavors.
What preparations should be made?
One vital step is for the founders to align
themselves with key advisers, including
legal, accounting and investment banking,
at a minimum. The company also will need
to secure an underwriter to complete the
public offering. The key is starting early.
At the base level, a company must have at
least two to three years of audited financial
statements. The registration statement itself
includes a prospectus, and in order to prepare
that prospectus, a great deal of information-
gathering must be done among the
legal and accounting professionals, as well
as the underwriter and its counsel.
What is the lead time needed to go public,
and what are the cost factors?
At least six months — and it could be
more or less depending on the company’s
state of preparation. Companies should
consider that underwriting commissions
and expenses range from eight to 12 percent
of the offering proceeds, plus several
hundred thousand dollars in accounting,
legal and printing costs.
Business owners need to gauge how
much they need to raise, and balance that
against how much of the company they are
willing to sell.
How has the rate of companies going public
changed in recent years?
After the dot-com era, the IPO market
cooled off for a period. When SOX
(Sarbanes-Oxley Act) took effect in 2002,
there was another cooling effect for companies
going public. In fact, executives of
public companies began to question
whether they should remain public
because of the new regulatory burdens.
Is going public now more difficult with the
Sarbanes-Oxley Act?
Yes, there are strict rules for the functioning
of audit committees, accounting
firm requirements and, of course, internal
controls over financial reporting. The internal
control aspect has caused extensive
work for companies, requiring internal and
external resources to document and test
their internal controls as required by SOX.
A company is required to have this documentation
and testing in place so the auditor
can then verify that information and
include those reports in the public filings
made after completing the IPO.
Private companies anticipating going public
should be wary of pitfalls, including
greater lead time, the extent of documentation
needed, and judgment about the quality
of the documents from an internal and
external standpoint. If companies just barely
comply with SOX’s Section 404, they will
miss potential benefits, such as tightening
controls over the business, streamlining
operations by eliminating redundancies,
and providing a higher level of assurance to
investors and potential investors that the
company is, indeed, taking the right steps.
What about a reverse transaction: Are public
companies going private?
It certainly is one trend we see today.
Some companies view the cost/benefit of
staying public in the heightened regulatory
environment as a lose-lose proposition and
are pursuing ‘going private’ transactions,
mergers or other steps to eliminate their
regulatory requirements.
WAYNE R. PINNELL, CPA, is managing partner of Haskell &
White LLP in Irvine. One of the largest independently owned
accounting and business advisory firms in Orange County,
Haskell & White provides a full complement of tax, accounting
and auditing services to public and private middle-market companies.
Reach Pinnell at (949) 450-6200.
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