Entrepreneurs with visions of taking their company public one day may look forward to announcing their IPO by ringing the bell at the stock exchange on Wall Street and celebrating at an extravagant closing dinner with the founder team. These heady pre-IPO dreams may quickly run into a number of significant real world challenges, however, that are regularly faced by the management of public companies. This blog post reviews some of the serious issues that public firms regularly confront, which should be weighed carefully by private company owners before they decide to move into the public market.
The Cost Factor – Public Companies Are Extensively Regulated
The vast difference in the way that public and private companies are managed results from the extensive federal regulations that govern the operation of public firms. Moving into the public realm requires the company’s management to learn an entirely new language filled with acronyms, e.g., just a few of these are Sarbanes Oxley (SOX), the Securities & Exchange Commission (SEC) and the Federal Trade Commission (FTC). The dictates of federal law and the regulations promulgated by federal agencies will require the company to engage in detailed internal compliance procedures, file financial reports, accept audits by independent third parties of their financial performance and abide by operating requirements that did not exist when the company flourished as a private, closely-held business.
While a successful IPO will generate a sizable financial war chest, there are trade offs that should be considered by the company founders. Once the company owners successfully take the business public, their management team will be required to spend more time and incur much greater expense complying with the federal regulatory scheme. Research indicates that the cost for a small company to enter the IPO marketplace averages about $2.5 million. And after a small-cap company becomes public, it can then expect to pay an average of about $1.5 million annually in compliance costs. (Read: The Cost of Regulation on Small-Cap Companies)