Public or private?
There have been a couple of recent announcements by Colorado companies regarding the choice to operate as a public or private entity. Natural Grocers just completed its IPO after operating as a private company since 1955. The proceeds provided some liquidity for current shareholders and will provide capital to pay down debt and support the continued growth of the company. Going in the other direction, Venoco, a publicly held company headquartered in Colorado, has recently announced that they are seeking to take the company private. This decision was based, in part, on the belief that investors weren’t valuing the company fairly.
Both Natural Grocers and Venoco are relatively large and established companies and are able to make the public/private decision based on what is in the best interest of the company at the time. There are a number of large companies that have changed from public to private and back again on numerous occasions based on the current state of the company and market.
But what if your company doesn’t have the size and/or history to generate the same amount of excitement from either the public or private marketplace? Let’s look at some of the reasons a company typically goes public:
1. To raise growth capital
2. To provide a market for existing shareholders to liquidate some of their holdings
3. The ability to use shares as currency to acquire other companies
4. The ability to raise future rounds of capital through secondary offerings
Assuming the company can generate enough interest for an IPO, they might achieve numbers one and two. However, numbers two through four also require that the company maintain interest from the public market after the IPO. If the company’s shares do not trade actively, they are not going to be attractive to fund acquisitions, it will be difficult for shareholders to realize the value in the company by selling, and secondary rounds will be extremely difficult.
Many lower middle market public companies have no analyst coverage, leading to limited trading volume for their shares. To make matters worse for these companies, the cost of regulation associated with being public has greatly increased over the last decade. The additional time and focus dedicated to compliance can also decrease productivity for these companies. Dealing with the burdens of being a public company without realizing the potential benefits can restrict growth and opportunities.
Public companies might want to consider going private if their stock trades for less than $10 per share, their trading volume is less than 100,000 shares daily, their market cap is less than $150 million, if they have no institutional following, or if the compliance costs of being a public entity are hampering the company’s long-term growth.
And private companies looking into going public might want to consider the alternative of bringing in a financial partner that can provide growth capital, acquisition capital, and experience without some of the costs and limitations that can affect lower middle market public entities.
The process of going public or private is not a simple one, but operating in the wrong market can be a costly proposition and limit a company’s ability to grow and compete.