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Family Business Going Public - Why Go Public? Why Not?

Provided by IFC Corporate Governance

Many family businesses take the decision of going public at some stage in their life to be able to secure financial resources for the business expansion or to give its shareholders a way of selling their shares in case they prefer to cash them in. Going public is a complex process that requires careful consideration of the alternatives, plenty of preparation from the board and the management, and extensive outside specialists’ advice. Going public is also a decision that presents many advantages and disadvantages to the family business.

Advantages of Going Public for a Family Business[1]

Going public may offer several advantages to family businesses and their shareholders, including:

- Improved Marketability of Shares: This makes it possible for family shareholders to sell their shares at the prevailing stock price in the open market. It also makes it easier for shareholders to use their shares as collateral to obtain loans. As a result, the improved marketability of the company’s shares helps reduce family issues as it solves the liquidity needs for shareholders who prefer to hold their wealth in assets other than their interest in the company.

- Improvement of the Company’s Financial Position: This is a direct result from selling the company’s shares to the public. The stronger financial position makes it easier for the company to seek loans and to negotiate the terms of these loans.

- Potential Increase in the Value of the Shares: Many family-owned companies that went public saw their stock price rise above the initial estimation made by the investment banking firm. This increase in value is partly due to the willingness of investors to pay a higher price for the company’s stock because of its greater credibility as a public company, the improved marketability of the shares, and the increased transparency of accounts.

- Greater Visibility: Going public gives family businesses increased prestige and visibility in the market. Markets tend to perceive public companies as professionally managed and more transparent (audited accounts and periodic publication of financial statements and performance data). As a result, a family business that goes public might increase its visibility in the market.

Disadvantages of Going Public for a Family Business[2]

Going public may also present potential disadvantages to family businesses. Some of these disadvantages are:

- Loss of Privacy: This is probably the most unwelcome outcome of going public for family businesses. Indeed, once public, the family business will have to reveal more information than before, including: detailed financial statements and other performance measures, and any advantages given to family members.

- Loss of Autonomy: This is a consequence of the arrival of new shareholders after the family business goes public. Even in cases where the family remains a controlling shareholder, minority shareholders have rights that will make it difficult for the original family members to operate unfettered.

- Increased Liability: Public companies have a higher liability than their counterparts. For example, public companies have to make sure that all the information that they provide to their shareholders and to the market is accurate.

- Possibility of a Takeover: If enough shares have been issued to outsiders during the process of going public, it could be possible for competitors or other investors to gain control over the family business.

- Additional Costs: The initial cost of going public can be quite substantial. Some of the potential components of this cost are: underwriter’s commission, auditing fees, legal fees, and any registration costs. In addition, once public, the company will incur additional costs such as audit fees, periodic disclosure of financial information costs, and any other compliance requirements’ fees for public companies.

[1] Monica Wagen, “Perspectives on Going Public”, Family Business, Spring 1996; Fred Neubauer and Alden G.Lank, The Family Business: its Governance for Sustainability (Routledge New York, 1998).

[2] Fred Neubauer and Alden G.Lank, The Family Business: its Governance for Sustainability (Routledge New York, 1998).

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