In the quest for business expansion, going public stands out as a strategic move that can significantly enhance a company's ability to raise capital. This process, often seen as a milestone for private companies, offers a plethora of benefits, including increased liquidity and market valuation. However, the journey to becoming a publicly traded entity is fraught with decisions and costs that entrepreneurs must navigate wisely.
The chances of raising substantial funds are markedly higher for public companies than for private ones. According to a 1998 article in Money Magazine, the likelihood of a private company securing $200,000 in funding is about 25%. In contrast, a spun-off public company's odds of raising $1 million can exceed 90%. This stark difference is largely due to the liquidity that public company stocks offer, allowing investors to buy and sell shares on platforms like the Over-the-Counter Bulletin Board (OTCBB) in the United States.
Liquidity is a game-changer because it reduces the perceived risk for investors. They are more inclined to invest in a company whose shares can be readily traded, as opposed to a private company where their money may be tied up indefinitely. This is why seasoned professionals often take companies public to secure financing, despite the potential for abuse of the system by unscrupulous stock promoters.
Investors have long advised business owners to sell stock rather than steak—meaning equity in the company rather than a share of the company's business plan. The rationale is simple: investors who buy into the steak may demand a significant portion of the business for their investment. On the other hand, selling stock allows entrepreneurs to retain control of their company while still raising the necessary funds. The financial world is replete with stock buyers, but steak investors are comparatively rare.
The distinction between selling a private company and a public one can be illustrated through their respective valuation methods. A private company is often valued based on its balance sheet, with a typical sale price being around 1.5 times its pretax profit. For instance, a private company with a pretax profit of $750,000 might sell for approximately $1,125,000.
In contrast, a public company is valued based on market capitalization, which is the share price multiplied by the total number of issued shares. This valuation can be significantly higher than the balance sheet valuation. For example, if a public company with 4.6 million shares out of 5.6 million issued trades at $5 per share, the owner's stake could be worth $23 million—a stark contrast to the $562,500 they might receive from selling a private company.
Raising capital, whether for a private or public venture, involves expenses. Entrepreneurs must decide whether to use their seed money to attract private risk capital or to pursue a spinoff and go public. The question to ask potential investors is whether they prefer stock or steak. With nearly two decades of experience in the stock market and investment sector, it's clear that stock is the preferred choice for most investors.
For instance, if an investor's seed money comes from 10% of the company, they would earn $56,250 in five years from a steak investment. However, if they invested in stock, their return could be as high as $2,300,000. The choice between stock and steak becomes quite clear from an investor's perspective.
While printing U.S. Dollars is illegal and would quickly attract the attention of the U.S. Secret Service, companies can legally "print money" by issuing stock with the permission of the U.S. Securities and Exchange Commission (SEC). The challenge lies in convincing investors and asset owners that the company's stock is more valuable than their dollars. Through a spinoff, a company can use its stock to acquire cash-producing assets without depleting its cash flow, potentially growing into a multi-million-dollar operation within five years.
Unfortunately, most companies on the OTCBB are run by stock promoters whose primary goal is to inflate the share price and sell their insider stock to the public—a strategy known as "pump and dump." The SEC has been battling this type of fraud for decades, but with limited success. The prevalence of stock fraud has tripled since 1991, indicating the ongoing challenge of regulating such practices.
A more ethical approach is the Merger at Market Cap Strategy, which involves hard work and perseverance to create a successful company. This strategy contrasts with the short-term focus of stock promoters and offers a more sustainable path to wealth creation. For example, I have resided in San Mateo County, California, since 1974, which serves as evidence of the stability and success that can come from a legitimate business strategy.
The majority of companies that go public do so through an IPO. While successful IPOs can bring in millions of dollars, they are expensive, and half of them fail. Private companies with less than $5 million in cash flow rarely qualify for an IPO. The costs associated with an IPO can be substantial, as detailed in an article from "Equity Finance Solutions" (Volume 3 Number 10, October 1999), which estimates total pre-IPO costs at $1,123,000.
An alternative to an IPO is purchasing an OTCBB trading shell, which can cost around $350,000, including professional evaluation fees and SEC filing costs. Reverse mergers, where the insiders of the shell retain their stock, are often less expensive upfront but can lead to significant costs down the line as the new owners struggle to overcome selling pressure from past insiders.
Spinoffs are a cleaner option, as they are created by distributing stock to the shareholders of a public company. The costs of a spinoff include audits, legal filings, ratings, share certificate printing, and finding a market maker, which can total around $150,000.
Without the automatic funding that comes with an IPO, those who go public via shells or spinoffs must find private placement funding sources. Professional help in this area can be costly, but it can significantly improve the odds of raising the necessary capital.
Going public requires a financial commitment, and entrepreneurs must be prepared to invest in the process. While IPOs are costly and shells come with their own set of risks, spinoffs offer a cleaner and potentially more cost-effective path to becoming a public company. The decision to go public should be made after careful consideration of the costs, benefits, and strategic goals of the business.
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Five Myths About Inflation
A classic definition of inflation is any increase in the money supply. Understanding inflation is vital to anyone seeking investment profits or attempting to build a successful company. As with most basic issues of the global economy, inflation is surrounded by myths and misinformation.
Recession Planning
The clouds of a 2006 Recession are starting to form on America's horizon.Politicians know that Recessions or Depressions are bad for their reelectionchanges. Bad economic times tend to create unemployment among the nice folksholding office at the time of economic stress. You can expect the Governmentto do everything possible to delay a Recession until after the November 2006election. However, the American economy is currently caught in an upwardmoving inflation and a Recession would still the fires of a runawaycurrency. The Real Estate Bubble may be about to burst. And, America'sfinancial institutions appear to be in increasing trouble over failedderivative bets.
African Aid
Africa, like everywhere else in the world, has its fair share of honest, intelligent; hardworking people who want to see their families have a better standard of living. Unfortunately, most of these people are living below the poverty line. The reasons that Africa, with all of its natural resources, is an economic basket case are complex. They start with the 16th Century Africans' failure to adopt an effective immigration policy. The result was the European immigrants divided up the continent without regard to historic tribal boundaries. The modern result has been tribal wars waged with modern weapons from the Sudan to Rwanda.
