Going public is a legitimate fundraising strategy for start-ups and established businesses alike.
Small business owners should consider this route when a significant amount of cash is required to be pumped into the business, and the small business owner either wants to avoid the strings attached to bank loans or is unable to raise the full amount required from venture capitalists, angel investors, and other sources. Although there are benefits to being publicly listed, the process is far from being quick and easy.
To begin with, there are the costs attached. For an initial public offering, several role players are involved in the transaction whose services must be paid for (e.g. underwriters, lawyers, accountants). The Johannesburg Stock Exchange charges an up-front listing fee, as well as an annual listing fee.
There are also costs associated with printing share certificates, bank charges, various duties (e.g. issue duty) and other items. Secondly, small business owners need to factor in time. The JSE’s listing guidelines indicate that listing can take nine to thirteen weeks depending on the method of listing, the complexity of the transaction and the competence of the professional advisers. Small business owners who have more immediate funding needs are therefore better off looking elsewhere as these timelines are just estimates.
The listing could take even longer if there are disagreements between the small business owner and the underwriter on what the company is worth, or if the small business owner is later discovered to have been hiding financial or legal problems which could affect the viability of the listing. Even before setting the process in motion, the small business owner needs to have sought out advice on whether the company is in a good position to list, taking into account its financial performance and prevailing market conditions.
For example, in order to qualify to list on the JSE’s main board, a business must have a subscribed capital of at least R25 million. Another crucial issue for small business owners to think about before listing is the loss of complete control and autonomy over decision-making and strategic direction. Whereas before the small business owner could do as he or she saw fit and had the flexibility to make decisions swiftly and informally, this changes once the company becomes listed. The small business owner becomes accountable to a board of directors and shareholders who may have a different vision and expectations.
Formal meetings (e.g. board meetings) must be scheduled to allow for consultation and debate. These different timelines and interests may frustrate the small business owner, potentially resulting in conflicts and the ousting of the small business owner as the head of the company that he or she founded.
The fanfare surrounding initial public offerings such as Facebook’s should not blind small business owners to the reality behind the scenes; the decision to go public should not be taken lightly.
Post By: Fadzai Munyaradzi