Editor’s note: Mal Mixon, former chairman of Invacare Corporation and a well-known entrepreneur, will regularly share his business advice and experience with Smart Business readers. Ask him a question at [email protected], and your inquiry could be the inspiration for his next column.
Q: What are some of the reasons to take a company public? What may be some of the drawbacks?
A: There are three primary reasons to consider going public. The first reason is if you need money, most often to grow your company. When I was considering taking Invacare Corporation public, I checked with several venture capital firms. I compared their offers with the option of going public, and in almost all cases, the venture capital firms wanted twice the percentage of the company that I would give up by going public.
Second, going public will make a liquidity event for your original investors. They have no other way of getting out of their investment unless the entire company is sold, and a market recapitalization is out of the question. When a company goes public, shareholders can then sell their interests or keep them.
The third reason is that for a family owned business, being public gives liquidity opportunities without having to sell the whole company. It means if I wanted to sell some shares, I could do it.
As for the drawbacks, one of the principal ones is cost. You have to pay the dues for the New York Stock Exchange, comply with the Sarbanes-Oxley Act, you have to pay a public board of directors — that all adds up to cost.
Another drawback is that your financial information becomes public. You have to report a lot of information. But from the viewpoint of competing, you should never chase a competitor — you should chase your customers. If you take care of your customers in a superior way, you will beat your competitors. If you just chase competitors, by the time you catch up with them, they will have moved on.
Other considerations include how much time you want to spend wooing Wall Street. A lot of CEOs focus on the Street instead of running the company. I gave three or four talks a year, but I wasn’t obsessed with visiting Wall Street that much, and I had a person who works for me that covered most of that work.
Q: What is your advice on royalty-based investment models?
A: I built a great company that way. I was trying to buy a startup company that had a home health care bed, and I knew the product line fit very well with Invacare. I didn’t have a lot of money but I was able to convince the company owners they really had a good bed. I offered to pay them royalties. It was a win-win for both of us. I would make a profit, they would get their royalties.
We agreed upon a figure and once I paid that amount, it was the end of my commitment. So be sure to have either a specific amount, in my case $3 million, or a length of time, in your agreement.
A lot of people have inventions and instead of trying to start a company from scratch and go through all those problems, they can sell the product to a bigger company for royalties. There’s no cost; it’s all profit.
Mal Mixon is the former chairman of Invacare Corporation. A complete story of his Mal Mixon’s rise from rags to riches is told in his book An American Journey, published by Smart Business. It can be found at www.anamericanjourneybook.com and on Amazon.com.