This posting is a reprint of an article, co-authored by Bob Lamm and David Scileppi, that appeared in the Daily Business Review on July 15, 2016.
Recent months have been difficult for the initial public offering market. In fact, year-to-date, IPOs are down nearly 60 percent compared to last year. One of the bright spots in this IPO down market has been Sensus Healthcare Inc., a Boca Raton-based medical device company.
We are proud to have worked with Sensus Healthcare on its IPO, which priced on June 2; Sensus is now listed on NASDAQ under the SRTSU symbol.
Though we’ve worked on numerous offerings over the course of our careers, the Sensus transaction reminded us of some key things that companies should consider as they proceed toward an IPO.
1. Have the right reasons to go public: There are valid reasons to go public. A public offering is still an effective means of raising capital and creating liquidity and/or wealth. Some companies achieve these goals by merely starting the IPO process as the public filing of a registration statement can attract buyers and obviate the need to complete the offering. But IPOs are costly, time-consuming and distract management from running the business. Accordingly, it doesn’t make sense to start an IPO “just for the fun of it.”
2. Choose the right advisers: You’re going to be spending a lot of time, and likely dealing with some difficult issues, with your counsel and other advisers as you prepare your Securities and Exchange Commission filings. So while it’s important to select advisers who are experts in their fields, it’s equally important to select advisers with whom you are comfortable and in whom you can place complete confidence and trust.
3. Pick the right time: Timing is critical in several respects. First, you need to pick a time that is right for your business. There may be unicorns out there that can launch an IPO with no revenues, but these days most companies seeking to go public need to have revenues, a sound business plan and profitability — or a reasonable expectation of profitability — to successfully complete a public offering. And for profitable and soon-to-be profitable companies alike, it may be advisable to delay an offering if you may be facing a period of slow or stagnant growth.
Second, your company culture needs to be sufficiently mature to take on the significant responsibilities of being public. You’ll need to implement and maintain a variety of systems — internal financial controls, disclosure controls and governance checks and balances, among others — to survive and grow as a public company. Beyond having the right people to execute these and other responsibilities, your company needs to be culturally prepared to take them on and to live in the fishbowl of public ownership and the scrutiny it brings from investors and regulators alike.
Market timing is also key, and is the most challenging. Markets are increasingly volatile, and even if the IPO market is robust when you start the process, it can change dramatically as you near completion. Among other things, you need to be prepared to wait if the market isn’t right as you approach pricing and closing.
4. Be realistic — and be prepared: As noted above, the IPO process is time-consuming, and difficulties can come up along the way to make it more so and frustrating to boot. If you go into the process thinking that it’s the financial equivalent of dropping a tea bag into hot water and just waiting for the result, think again. You need to be prepared to deal with difficultie
and delays, frustrations and challenges.
5. Know that closing the deal is just the beginning: The transition from private to public ownership can be tough and in some cases can take years. If your business has been family-owned, it can no longer be operated in the same way; there are new accountabilities and responsibilities. The board of directors is likely to challenge management; regulators may ask probing questions and in some cases investigate long-standing practices; and the investing public may second-guess actions that have long been strictly management prerogatives. These behaviors — which are increasingly prevalent in our era of investor empowerment and activism — can be difficult
for companies to deal with, from both a business and a psychological perspective. Moreover, in times of short-termism, companies cannot rest on the laurels of past achievements; the investing public is fickle, and past performance may lead to questions of “what have you done for me lately” if growth slows down or stalls.
These and other challenges should not prevent a company from considering or launching an IPO. As noted, IPOs remain effective ways of raising capital and achieving liquidity. However, it’s best to go into an IPO with full awareness of the challenges of going and remaining public.
Reprinted with permission from the July 15 issue of Daily Business Review. © 2016 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or firstname.lastname@example.org.