The Advantages of Going Public and Where to do it
Lower Cost of Capital. Private companies, having exhausted its bank lines, must typically raise its financing from institutional investors. These institutions generally demand stiff repayment terms, a major ownership position, as well as significant operational restrictions. Investors find that the value of equity securities in a private company is reduced because of lack of liquidity.
Publicly trading companies often trade at one to ten times the value of the private company of the same relative size and type. Because the public company has better and more accessible alternatives for raising capital, it provides greater leverage in its negotiations with both individual and institutional investors. Public companies offer a quick “exit strategy” to its investors as the stock can be readily sold in the public market. Investors find the liquidity factor of a public company reassuring.
Personal Wealth. A public offering enhances the personal net worth of the major stockholders in the company. Even if the shareholders do not realize immediate profits through the sale of their existing stock during a Direct Public Offering, their stock can be used as collateral to secure loans.
Competitive Position. The increased availability of capital to a public company often allows the business to enhance their competitive position in the marketplace. Customers want to deal with well-financed businesses. Public companies often have stronger balance sheets than do other companies. A strong balance sheet is a strong marketing tool.
Prestige. A company’s founders, managers and Board of Directors gain enormous personal prestige from being associated with an emerging public company. Such prestige is useful in recruiting key employees and management personnel, as well as in the marketing of products and services.
Ability to Take Advantage of Marketing Price Fluctuations. Wall Street and other investors prefer public companies to use their existing capital to make acquisitions which allow a company to grow at a faster rate. More importantly, a public company can initiate growth by using its own stock to acquire new companies. A private company is forced to use cash or notes for acquisitions because their stock lacks the necessary liquidity to make it desirable to investors. This ability to grow through stock acquisition permits a public company to use pooling-of-interest accounting for its acquisitions.
An acquiring company using this accounting system can reflect the income the acquired company has earned prior to the date of acquisition as part of its own reported income. Pooling accounting also avoids the diminishing of a company’s future income caused by goodwill is amortization If pooling accounting is available, no goodwill is created and no write-up of fixed assets is required.
As a result of pooling accounting for acquisition, a public company’s reported earning can increase dramatically. Following the merger, the acquiring company’s stock should reflect the acquired company’s earnings multiplied by 20. Additionally, because a public company’s stock trades for a multiple of reported earnings per share, significant increase in reported earnings can result in a corresponding increase in the price per share.
Enhanced Borrowing Power. Banks and other financial institutions are less likely to require personal guarantees from the principals of public companies than from those of private companies as the corporate stock has much greater liquidity potential.
Greater Ability to Raise Equity. Company growth may eventually necessitate finding additional financing sources. A public company whose stock performs well is usually able to sell additional stock in the market at a very favorable price freeing up monies to fund growth opportunities.
Liquidity and Valuation. AA public company has a market for its stock and provides an effective way of valuing that stock to its shareholders and principals. Subject to Rule 144, the public company’s shareholders and founder can sell whenever the need is necessary. The stock prices can be followed on a day-to-day basis with daily quotes from the reporting exchanges.
Attracting Key Employees. Stock options offered by emerging public companies retain a high level of appeal to help recruit well-qualified executives, while providing added motivation to employees to perform well. A majority of top level management individuals will not take a position with a private company preferring the greatly enhanced income potential of a stock option program offered by a public company.
A stock option program helps connect the financial futures of employees to the company’s long-term success, hereby providing incentives for increased productivity and loyalty.
Recruiting Distributors and Manufacturing Representatives. In a competitive marketplace, stock options can be used as bonuses or regards for increased sales performance or achievement of goals. The potential for using stock option program, as part of a performance package or to increase brand or product loyalty outside the company’s, is nearly limitless, garnering greater overall support and success across a broader range of business groups.
A major difference between Nevada or Delaware and Wyoming. You normally need a public company to be able to issue millions or billions of shares of stock. If you do this in Nevada, your cost will be around $35,000.00, per year. Your cost in Delaware can be in the hundreds of thousands of dollars per year. Your cost in Wyoming can be $60.00. Wyoming allows a company to issue as many shares as they want, without billing extra for them. So if you are thinking of starting a public company, or if you think you may want to take your company public, in the future, call us for more information.