An initial public offering (IPO) is often seen as the Holy Grail of business.  Especially with the frenzy of dot-com IPOs and their fast run-ups, many business owners see an IPO as the ultimate goal.

In reality, an IPO is a complex, expensive, massive undertaking that dramatically changes a business and its owners' lives.  While going public may be a wonderful thing for some businesses for many reasons, it is absolutely the wrong thing for most businesses for some very particular reasons.  Only a few of the businesses out there will qualify for an IPO and even fewer of them will ever complete one.

Make no mistake, an IPO is a major business achievement for any owner who gets there, but it also is not the road to instant wealth or a fast exit.  And some of the people we talk to today are erroneously eyeing an IPO to cash out quick.

When to Consider an IPO
A business owner should look at the possibility to going public if he or she is seeking to accomplish some very specific things.

• Obtain large sums of money in order to grow the business and fund acquisitions;
• Obtain capital and marketable stock to attract and retain the very best talent (a huge issue in today's job market, where demand vastly exceeds supply);
• Achieve significantly greater awareness of, and attention to the company and its products;
• Build a sustainable business for the long haul;  and
• Build enormous wealth for owners over the long term.
• Overall, an IPO may be for you and your business if you can afford and are willing to invest a large sum of money upfront to pursue the goals above.  If it still looks like a good idea, consider the new world you will be living in after an IPO.

Assessing the Post-IPO Reality
A business owner's world will change almost completely after an IPO for a number of reasons, most of them related to the nature of being a public entity.

You, the owner, will no longer sit at the top of a relatively simple organizational chart. There will be all the shareholders and a Board of Directors above you, and several new departments below you. Plan on adding investor relations, legal relations, SEC (Securities and Exchange Commission) relations and more functions, personnel and departments to your org chart.

You and your business will have new, demanding issues, such as the concerns of shareholders, your new group of bosses.  You will be acutely aware of current earnings and stock price fluctuations, which can force you to focus on the short-term to the potential detriment of your long-term vision and strategy. In fact, your life will revolve around a constant, grinding awareness of the stock price.

Once public, a company can become a target for hungry plaintiff attorneys who will launch lawsuits if the company fails to meet its stated earnings and performance projections.

The CEO's workday, instead of becoming shorter and filled with rounds of golf, will become longer. The CEO will spend a lot of time on grueling road shows, touting the stock's value to investors around the world, along with handling the new pressures that come with being a public company.

Consider a Strategic Sale Option
Instead of taking your company public, you might want to consider selling to a strategic buyer. A strategic buyer is an entity, often a public company, that can leverage what your company can do in ways that you cannot.  In other words, a strategic buyer is buying the future rather than the past (financials and balance sheet) and therefore likely to offer top price.

Why a sale?  In short, because most business owners achieve personal wealth that way.  And because it may stack up as a better solution when you compare an IPO and a sale on several dimensions.

An IPO costs much more than a strategic sale.  Estimates are that the act of going through an IPO costs 7½ to 8½ percent of the value of the company, including underwriter's commission, legal and accounting fees, investor relations, printing, road show and initial listing fee.  For a $25 million offering, that's between $1.875 million and $2.125 million.  Add to that the cost of running a public company on a going forward basis, estimated at $250,000 to $300,000 a year.

A strategic sale, including fees for an intermediary such as ourselves, as well as legal and accounting fees, will cost about 3 to 3½ percent, or between $750,000 and $875,000 on a $25 million sale.  In both cases, a smaller transaction will result in a higher percentage.

An IPO will generate more value (capital) than a sale. Almost always, the market cap of a public company is greater than the sale price of a similar private company.  It is not unusual for a sale to generate about 30 percent less value than an IPO.

A sale creates liquidity and an exit potential for a business owner much sooner than an IPO. An IPO is not really the sale of the company, so you don't walk away with the money. Very seldom is the owner's (or founders') stock part of an IPO;  that stock is "locked up" for at least six months after the IPO. Occasionally founders' stock can be wrapped into a secondary offering, but only if the earlier IPO and subsequent performance were successful.

An IPO is not an exit, at least not in the near term.  Unless you have recruited and trained new leadership before the IPO, you are obligated to remain.  Meanwhile, you have become a bigger target (part of the nature of being public) and lost your privacy, since everyone will know what you earn and what the stock you own is worth.

Boiling it Down to a Decision
In summary, once you have determined what your ownership is worth, consider this.  You can go through an IPO, which locks you into a concentrated position for some period of time with enormous market risk.  Or you can go through a strategic sale for cash and marketable securities, and diversify, possibly into opportunities with far better growth potential than the business you sold.  Not every company is Qualcomm.

Phillip L. Currie is Managing Partner of Shoreline Partners LLC, a San Diego-based, middle market investment banking firm that handles sales of privately held companies with $10 to $200 million in revenue and acquisitions for public companies.  Currie can be reached at 858/587-9800 via Email.