There is now a real investor desire, and even a need, for strong companies to be in the public markets. According to a May 2017 Ernst & Young report, the number of domestically incorporated U.S. listed companies dropped by more than 45% between 1996 and 2016. The amount of cash liquidity in the U.S. banking system is $2.2 trillion, according to Federal Reserve economic data (Dec. 7, 2017). Going public can be the capstone accomplishment of a long and successful career. What questions should family business owners be asking in 2018 to determine if they are ready to take their company public?
Question #1. Which has greater priority: maximizing wealth and liquidity or maintaining maximum control? One will prevail over the other, and it is best to consider this question early in the process. Illustrative of this is the recent Snap Inc. IPO. The founders retained control through a dual-class stock structure that gave them 89% of the voting power although they held only 44% of the equity. Because of the lack of voting rights, Snap Inc. shares were excluded from the relevant MSCI indices, suppressing the pool of prospective investors.
Question #2. Whose wealth is being maximized, current or future generations? The more generations, the more important the question. Generational interests can easily diverge, as demonstrated by the separation of the Pritzker family’s assets after years of discord.
Question #3. Who gets a vote on the upcoming direction and process? This issue must be discussed and ideally settled before the owners consider going public.
Question #4. How will current service providers be handled? Some of your legal, accounting, tax and estate advisers may be adversely affected. Others may see a windfall. Some will be displaced because of market needs, requirements or lack of qualifications. Long-time advisers may be displaced even if they are highly qualified, and long-term relationships may end up stressed or severed.
Question #5. How will current stakeholders — board, employees, customers, local community — be affected? You should also consider what weight should be given to stakeholders who are not decision makers. Family employees and long-time executives and board members may be displaced. This issue is highly personal; no single approach is best for every family ownership group.
Question #6. Who should serve on the team that will decide the myriad questions that must be answered regarding which stock exchange to list on and which service providers — investment bank, accounting firm, investor relations firm — to engage?
These six questions are worth bearing in mind whenever a significant change in ownership is contemplated. They are even more important before beginning the process of creating liquidity via going public. Once the above items have been addressed, there is another set of considerations regarding alternatives. There are alternatives to going public via an IPO that may be a better solution for your company.
Liquidity alternatives for family businesses
Going public: Which exchange?
Foreign exchanges come in and out of favor depending on that countries’ specific capital market dynamics. For an extended period the German market was booming as economic unification powered the German economy. More recently, the London Alternative Investment Market (AIM) and the Australian market have gained acceptance as viable, if not first-tier, markets.
NYSE and Nasdaq. If one decides to go the traditional IPO route there are two major markets to consider, the NYSE and the Nasdaq. Over-the-counter (OTC) networks are for small companies that can’t meet exchange listing requirements.
NYSE and Nasdaq vary in their requirements for initial listings. Specific requirements for each exchange and the alternatives offered are available on their respective websites. Among the deciding criteria are the following: pre-tax income, market cap, total assets, market value of public float, stockholders’ equity, minimum price and operating history.
Reality check Have you considered all the personal and emotional ramifications of being part of a public company? Employees, customers and owners will be affected. You will be required to report results every quarter. No meaningful problem or dispute will escape disclosure. There is a reason there are fewer public companies today, and that private companies controlled by private equity and venture capital are staying private much longer.
Allan Grafman is a director serving audit, compensation, nominating and governance committees. He has served on nine boards of public, private and PE-controlled companies. Previous roles include operating partner with a PE fund, CEO of a technology company and positions at ABC/Disney, Tribune and Archie Comics. He is CEO of AMV (AllanGrafman@allmediaventures.com).