Why Go Public?

The following are reasons to take your company public. It consists of more than one story to aid businesspeople and investors in understanding why going public can give a very strong boost to one’s net worth.

The Staying Private Story
Last year, your privately held company had $2 million in gross earnings. In addition, a secret admirer anonymously wires $2 million into your bank account so that you could expand your business. You never need to pay the money back. You will maintain full ownership of your company.

The Going Public Story
In a separate scenario, you do a private placement and then you go public. In the process, you sell some shares of stock in your company and raise $2 million. Doing so costs you one-third of the ownership of your company. You retain the other two-thirds and the majority interest. Of the 250,000,000 available shares in our story, you hold 166,750,000 of them. The investors hold 83,250,000 shares.

The cost to go public in the United States is merely $60,000, a portion of which can be paid for by your initial private placement investors. Whether the capital you raise is through money falling from the sky or going public, you can use the money to acquire other businesses in your industry, buy real estate and equipment, hire employees, etc. Thus, your company grows. When you decide to sell your company, it is making $6 million per year.

The Results of Each Story
So, which option would have been better for you to take five years ago? Should you have taken the “money-from-the-sky” method? Or should you have chosen the option to go public in order to get the top price?

The money from the sky method lets you keep 100% of your privately held corporation. In today’s market, a privately held company sells for 1.5 times its annual profit. Ask about any business broker nowadays and you will be told the same. Thus, you leave with $9 million. On the other hand, your public company will be gobbled up by a large global corporation. Your stock is now trading at 50 cents per share (which is a price to earnings ratio of about 18, which is typical for a growing organization). Thus, your 166,750,000 shares are worth over $83 million.

Which was the better deal for you?
Here is a not-so-secret secret: The vast majority of the Forbes 400 wealthiest people in the US earned their wealth by owning and/or selling shares of their own publicly traded companies.

The bottom line is this: Take your company public. Borrowing money from the bank will not get you nearly as far as going public and selling shares of stock in your company. When you go public you multiply your net-worth and that of your company. Your company’s market capitalization, which is the number of outstanding shares times the price per share, for a growing company is typically 10 to 25 or more times the earnings of the company.

The Angel Investor Story
Let’s say that you have $2 million to invest in an active corporation. A company a few blocks away has $2 million in gross annual sales. Your investment gets you one- half of the ownership of the company.

On the other hand, you invest in a company that is based in Australia that is publicly traded in the USA. The Australian company also has a gross income of $2 million per year. For your $2 million investment in the publicly traded organization, you get one-third of the shares that the corporation has issued.

A year goes by and both of the above companies get into financial troubles. If you chose the private company and it declares bankruptcy, you lose your entire $2 million investment.

Alternatively, if you chose the company in Australia, you can sell your publicly traded shares and may even make a profit. The liquidity of publicly traded shares makes the selling process fast and easy. This helps you control your risk and provides a strong reason for investing in a public company. So, you are better protected against loss because you can sell your shares at any time after the required holding period, if any. Thus, liquidity is another reason to invest in public companies and to think twice before investing in private companies.

What if the business does well? Five years go by and it turns out that the company has grown. You are ready to sell. When the company sells, the profit has grown from $2 million to $6 million per year.

Private companies typically sell for 1.5 times earnings. Investing in the private company gave you a one-half ownership of the organization. The 50% ownership that you have is worth $4.5 million. So, you more than doubled your money in four years. The US Small Business Administration (SBA) says that a profitable private company investment occurs less than 15 times in 100.

The private placement and subsequent transition to a public company option, on the other hand, resulted in a merger with a large international company. The shares in your public company trade for over $0.72 per share when the merger takes place. So, your 125,000,000 shares are worth over $90 million.

So, if you act as an angel investor, if successful, you may double your money investing in a private company. If you, instead, invest in a public company that experiences a similar growth rate, you would expect, in this example, to earn 45 times your initial investment during the same timeframe. Moreover, with the public company option you have much greater liquidity if something goes wrong. You can more readily use the stock as collateral if something goes right.

Thus, some good reasons to go public are:

    1. Greater liquidity.
    2. Greater return on investment.
    3. Much greater leverage when the company is sold.

So, it is clear that it is worth considering to go public and to invest in public companies.