We Went Public

It's not an easy process, but the CEOs of these Inc. 5000 companies believe it was worth it.

By Tamar Snyder |

One of the biggest decisions a growing company will face is whether to go public. To some company founders, selling shares is akin to reaching the brass ring -- the ultimate business dream. Why? Because although the road to a successful IPO is dotted with regulatory hassles and higher expenses, the reward is investment capital -- money that can be used to build the business. Several 2008 Inc. 500|5000 companies have braved this road with their sites set on the prize, and they shared with Inc.com the highs and lows of the process.

Capital Exchange

The first, and arguably most important, consideration a company must make when deciding to go public has to do with capital. Selling shares to investors can produce a quick influx of capital to companies. This capital can be useful for companies in need of liquidity and can provide a reward to early investors seeking a ROI, explains Rick Stover, Chief Technology Officer of Energy Recovery, No. 396 on the Inc. 500 list this year. "We had long-term investors that had money in the company for up to 20 years and who wanted some liquidity."

Going public can be helpful because it introduces a company and its products to a much wider audience. Energy Recovery, which went public in July, manufactures an energy recovery device that derives energy from desalination seawater plants. Increased visibility on the American stock exchange spurs stock activity and in turn has created new interest in its technology, "inquiries that we would not have had we not gone public," says Stover.

Presenting itself as a public company has beneficial repercussions for the general public, as well as investors. The media is tuned into what goes on with the stock market and keeps the public informed about public companies. Also, investors are more likely to invest if they are confident the company is complying with Sarbanes-Oxley and is reporting earnings regularly.

However, filing an IPO cannot just be looked at as a way to make easy cash. The costs and headaches associated with the process can be too much for many private companies to handle. The process of going public can take anywhere from six months to a year. A company must develop its story to sell to underwriters in the road-show process in which the company repeatedly presents itself to investment banks. "It's surprising how grueling it is to tell your story over and over again," says Adam Singer, CEO of IPC The Hospitalist Company--No. 3,198 on the 2008 Inc. 5000 list. For Stover, it was the scrutiny by lawyers and accountants that was most difficult to deal with.

Companies may have to make internal changes to comply with SEC regulations. Energy Recovery brought on a new CFO and controller to improve financial discipline and control and regularize financial reporting. Intrepid Potash, No. 3,122 on the Inc. 5000, also added a CFO. Ranked at No. 1,611 on this year's Inc. 5000 list, Heritage-Crystal Clean, No. 3,682 on the Inc. 5000, an environmental services firm, already had "established independent relationships for our banking, audit and accounting, and information technology," says CFO Greg Ray. Singer has a positive attitude about what can be a draining process: "Try and embrace whatever the new rules are," he says, "you can fight these rules, or you can be a better company by complying."

Red Tape and other Barriers

Making all of these changes costs money. Compliance with SEC regulations and procedures "can be a real strain for smaller companies," drawing away from their bottom lines, says Paul Bard, Vice President of Renaissance Capital, an IPO research firm. It is generally considered optimal that a company have a minimum of $100 million in revenue before considering going public. Smaller companies are viewed as riskier by investors. This concern is echoed by Ray of Heritage-Crystal Clean. "For our company, the key consideration was whether we had reached adequate size for a successful IPO. We knew that we wanted to go public at some time; the main question was when. If investors had considered us too small, then we would have deferred our IPO." For RiskMetrics, going public was made easier by the acquisition of two companies, which doubled the firm's size.

The costs don't ebb once a company makes it to the stock exchange. Operating as a public company invites a host of expenses involved with financial reporting. Costs can stem from the need to keep shareholders informed about your company's operations and finances. Shareholder approval is often needed before executives can take action, a mode of operation that can take some getting used to for most entrepreneurs.

Last year, we listed the Top 100 Inc. 5000 Companies Intending to Go Public. Of those 100, just 10 actually completed and are currently trading shares. This reflects a general trend in the equities market; there is always a discrepancy between those companies that file IPOs and those that make it to the pricing stage. According to Renaissance Capital's IPOhome.com, in 2007, a total of 374 companies filed; 273 priced. As of this writing, 133 companies have filed IPOs thus far in 2008, and 42 have priced.