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Going Public … Is it Right for You?

September 28th, 2012

When funding is required to expand a product line, invest in research and development, target a new market or buy a competitor, companies often consider public markets to access capital beyond banks lines, internal cash flow and access to friends and families or other investors.

However, the decision to go public needs to take into consideration more than just “can we access the money” and the following are some important questions:

Why are we going public? The why of going public is just as important as the how. Are you looking for financing, trying to reduce the cost of capital, planning an acquisition strategy and needing shares for currency, looking for liquidity for insiders or a payout for early investors, or do you believe being public will enhance your corporate image? Brokers, investment bankers and investors will want to know why you are going public and your answer should be informed and logical.

Do we have the resources to go public? Going public takes time and money. There are legal fees, audit fees, Exchange fees, and so on, some of which can be deferred to closing and others which are required through the process. Operational resources (people) are required to manage lawyers, accountants, brokers and so on. Can your company afford the time it takes to raise money in the public markets, do you have people that understand the process or do you need to hire an advisor who can serve as your “general contractor” and thus reduce the impact on your operations?

What is our plan? Your business plan post-financing must be well thought out and your financial forecasts supported with reasonable assumptions. You must show investors how they will generate a return from investing in your company. You need to have a story that gets people excited – a market niche, a roll up, penetrating a big new market – something must make your business stand out.

What are we doing with the money? Do you have a detailed use of funds to provide to external parties? An outside advisor can work with you and ask the tough questions that will prepare you for investors down the road. Remember, you never get a second chance to make a first impression, and this especially holds true with the public markets.

Are we working with the right people? Choosing the right investment banker is critical to the go-public process. Do they have specific experience or an interest in your industry? What is their track record for financing? How much of the financing do they expect you to bring to the table? These are all important questions you need to have answered before you sign on and commit.

What is the best way for us to go public? There are multiple go-public options – in general, a company can list via either an Initial Public Offering (IPO) or a Reverse Takeover (RTO). The go public options for the TSX Venture and the Toronto Stock Exchange are summarized in the chart below.

TMX

Each of the approaches has its advantages and disadvantages to the listing company that can be summarized as follows:

a. IPO:

Advantages:

    • Minimizes dilution as compared to an RTO
    • Is considered by some investors a higher standard of public listing as compared to an RTO

Disadvantages:

    • Filing requirements with Provincial securities regulators
    • The risk of not completing due to market conditions may be higher

b. RTO:

Advantages:

    • May be somewhat faster
    • The RTO shell will come with an experienced management team that can add a lot of value

Disadvantages:

    • Potential skeletons in the closet such as unhappy shareholders and various liabilities
    • Opportunity for legacy shareholders to sell their shares before the new group, depressing the stock price

For many management teams and business owners going public is something they do only once and it can be a big gamble to do it without the right professional assistance.  Evans & Evans has a team of individuals whose business focus is guiding owners and management teams through the go-public process and avoiding the common pitfalls of an unsuccessful offering or an orphaned stock.  Please contact Michael Evans directly to learn more about the breadth of services we offer companies that are seeking to go public and visit our website to review go public transactions we have facilitated.