Going public Featured

8:00pm EDT September 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 key preparation 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 test 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.