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Why Not to Take Your Small Business Public

By: Matt Gossett

 

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When in need of cash to fund your business expansion, you might consider initiating contact with an investment bank to discuss your options for an Initial Public Offering (IPO). While many entrepreneurs decide to go public for the enticing financial incentives, I’d like to discuss a few reasons why many small businesses choose to hold strong and maintain their status as a privately held entity.

 
Decision Making
 
One of the best parts of starting your own business is that you have the ability to directly control the entire decision making process. As a public company, you can still impact the outcome of decisions but your power to influence the process is severely diminished once you must seek the approval of a board of directors whose primary objective is to offer more shareholder value.
 
Execution
 
Being able to execute ideas in a timely, efficient manner is a critical component that distinguishes small businesses from large corporations. Once your company goes public, try convincing your CFO that it’s alright to invest money in a new project right before your next earnings release, and they’ll think you’re crazy. A public company has to consider a wide range of implications before executing an idea.
 
Financial Pressure
 
Most entrepreneurs start a company in pursuit of a dream. As a public company, your purpose can easily be diminished when following your passion becomes a secondary objective to providing value to your shareholders. As a corporate executive, it’s important not to favor your desire to make as much money as possible over your original mission for doing business.
 
Investor Relations
 
Public companies have a legal obligation to communicate with their investors. Once your company grows to a certain size, you’ll have to hire employees whose sole purpose is to inform investors of what’s going on within the company. For the same reason that political campaigns are stressful, you probably won’t enjoy having to always worry about the public perception of your company.
 
Privacy
 
Perhaps one of the most obvious reasons for holding your company as a private entity is to maintain the privacy of information. A public company is required to release a massive amount of information to its shareholders to provide an honest public portrayal of its performance, which might make you uncomfortable in knowing that this opens you and your business up to all kinds of scrutiny.
 
Media Relations
 
As a public company, the media is either one of two things: your best friend or your worst enemy. Whether businesses like to admit it or not, their value as a company depends as much on their performance as on the media’s perception of their performance. Before deciding to invest in a new project, you’ll need to consider how the media will portray your idea to the public.
 
Control
 
The word “public” carries meaning in that it distinguishes a company as being subject to control from outsiders. Essentially, the power to influence the decisions made in a public company falls to whoever owns the majority stake. In extreme cases, this means that an individual or another corporate entity can come in, buy up 51% of your shares and overrule any decision made by your board of directors.
 
Conclusion
 
Before deciding to prepare your business for its IPO, be sure that you’re aware of the implication that taking your company public will have on your business’s ability to make decisions and accomplish tasks in a potentially turbulent corporate environment. If you decide to go public, don’t lose sight of why you started your business in the first place when the dollar signs start calling your name.
 
Are you considering an IPO for your small business? If not, what’s holding you back?
 
Published: October 29, 2013
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Matt Gossett

Matt Gossett is a writer and editor for Tarkenton Companies. A graduate of Washington and Lee, Matt is currently studying International Business at the HEC School of Management in Paris. He specializes in leadership issues, combining insight from business, athletics, and education. Connect with him on

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