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The Two Reasons to Take Your Company Public

The Two Reasons to Take Your Company PublicAs Told in Two Modern FablesBy William CateAugust 2004[] [

The Two Reasons to Take Your Company Public
As Told in Two Modern Fables
By William Cate
August 2004
[] []

In the tradition of Chaucer's Canterbury Tales, here are two fables that illustrate to entrepreneurs and investors why being public is the only sound business strategy.

The Tale of the Business Owner

In 2004, your private company is grosses $1 million per year. Your Fairy Godmother will give your company $1 million for expansion of your company. You won't have to repay the money. You'll keep 100% equity in your company.

Your alternative is to take your company public and raise $1 million for it in a private placement. The process will cost you a minority interest in your company. Your insiders will retain about two-thirds of your
company's equity as shares in your public company. Your insider group will have about 3,333,333 shares of the public company's stock. You'll risk less than US$50,000 to go public in the United States. In either case, you'll use the investment money wisely and make acquisitions to rapidly build your company. In five years or less, you'll want to sell your company. At the time of your company's sale, your company's profit is $3 million/year.

Which offer should you have taken five years earlier to get the best price for your company?

The Fairy Godmother option leaves you with 100% ownership of your
private company. Your private company could sell for as much as 1.5 times of its annual profit (considered by most business brokers to be a very high estimate). Your golden parachute is worth $4.5 million.

The public company option assumes that your public company will merge in five years with a stronger multinational corporation. Your company's stock should trade over $60/share. At that price, your 3, 333,333 shares will be worth about $200 million.

Which was the better deal?

The moral of this tale is: take your operating company public! The money you'll raise from your equity financing isn't as much as the money you'll earn from the sale of your stock. Being public allows you to leverage the value of your company because the market capitalization (shares issued multiplied by the share price) are almost always a multiple of the balance sheet value of that company.

The Tale of the Angel Investor

It's 2004; you have one million dollars that you want to invest in an operating company. There's a private company on the other side of town grossing $1,000,000/year. It's well run and you will get 50% ownership of the company for your money.

The alternative for your million dollars is an investment in a South African company whose shares trade in the United States. The South African public company is grossing one million dollars a year. If you do the one million-dollar Private Placement in the South African company, you'll get one-third of the issued shares of the public company.

Two years pass and whichever investment you chose is now in financial trouble. If you chose the private company across town, you will lose your million dollars if the company declares bankruptcy.

If you chose the public company in South Africa, you can sell your shares and recover your risk capital and possibly make a profit. The ability to sell your shares and control your risk is one major reason that you should have invested in the public company. Investing in public companies offers you protection against loss, since the public shares can be sold at any time after the required holding period. This risk protection is called investment liquidity and is the reason that you should only invest in public companies.

The alternative to possible corporate failure is business success. Five years pass and you made a wise investment and it is ready to be sold. Your investment has performed equally as well be it in the private or public company. At the time of your company's sale, your company's profit is $3 million/year.

The Private Company option gives you 50% ownership of the money from the sale of your private company. Your private company could sell for as much as 1.5 times its annual profit (considered by most business brokers to be a very high estimate). Your 50% ownership is worth $2.25 million. You have better than doubled your money in just five years. A great investment that happens less than fifteen times in a hundred according to the U.S. Small Business Administration (SBA).

The public company private placement option assumes a public company merger with a multinational corporation. Your public company's shares should trade over $60/share at the time of the merger. At that price, your 1,666,667 shares will be worth over $100 million.

As an angel investor, you can invest in private companies and, with success, expect to better than double your money. Or, you can invest in public companies and, with equal success, expect to earn fifty-fold your investment in the same time period. The public company choice is always the wiser choice because it gives you liquidity should things go wrong and leverage should things go right.

The two reasons that every company should go public are (1) it gives the insiders and investors leverage at the time of the sale of the company. And (2), it offers liquidity to investors, should the company start to fail.



To contact the author: Visit the Beowulf Investments website: [] OrComputer Technology Articles, visit the Global Village Investment Club Website:

Article Tags: Company Public, Private Company, Money You'll, Private Placement, Public Company, Five Years, Million Dollars, South African

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He has been the Managing Director of Beowulf Investments [] since 1981 and is the Executive Director of the Global Village Investment Club []

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