Jan 8, 2002

Exiting Through an Initial Public Offering

Although this exit strategy is an option for only a select group of entrepreneurial companies, its rewards are well worth the careful planning required.

 

There's nothing really fair about initial public offerings.

For the owners of plenty of really great entrepreneurial ventures -- I'd go so far as to say for most of them -- there isn't a snowball's chance in hell that they'll be able to cash in some or all of their equity stakes by taking their companies public. This window of opportunity is simply too narrow for most privately held corporations to squeeze through. The dot-com mania of the late 1990s, extreme though it was, epitomized a reality that most small business experts know all too well: The only likely candidates for an IPO are those companies on a short list of hot industries -- a list that shifts according to the whims of the stock market -- and those that seem destined to grow fairly quickly to $100 million or more in revenues.

Regardless of what fantasies you may have had back in those early start-up days, by the time that you reach Stage Three of operations, you should be capable of assessing your real chances for carrying out this type of exit strategy. After having tracked the financial paths of entrepreneurs for more than a decade, I'm convinced that there are basically only two routes that will get you to an IPO:

  • Leap onto the fast track early. If your start-up or early-stage business plan demonstrated enough accelerated-growth potential that you already have been able to bring in one or more rounds of venture capital money, you've very likely got the network of contacts and financial infrastructure in place to enable you to carry off an IPO at some early point in Stage Three. That assumes, of course, that you have been able to follow your business plan and basically achieve its targeted objectives. During the late 1990s, when this segment of the capital markets seemed to throw all caution aside, plenty of fast-track companies went public during Stage Two of development, when their business models were scarcely proven, let alone profitable. But given the failure of so many of those IPOs, that pattern isn't likely to repeat itself in the near future.
  • Shift gears. At some point in a business venture's development, the owner may decide to diversify into an area that presents extraordinary growth potential or choose to change the company's plan, perhaps to pursue business on a national or international scale rather than simply a regional one. In some cases, after years of steady and profitable growth an entrepreneur's ambitions simply expand, seeking new and intensified challenges that may lead to the acquisition of competitors or the development of new business lines. Whatever the spark, it can ignite a new, turbocharged set of business plans and opportunities and attract venture capitalists, investment bankers, and IPO underwriters to a Stage Three company that previously lacked their attentions.

    If you find yourself in either of these two situations, this action plan should help you carry out a successful exit through an initial public offering:


    Business Planning

    Believe it or not, this part of your planning process is fairly simple, in part because if you truly are a likely candidate, you've got a team of advisers and professional investors already in place, ones who understand what's necessary to bring these deals to a profitable conclusion. That's the good news and the bad news. With this type of transaction, as opposed to exits through a sale to an individual or a corporate buyer, you won't be able to dictate this process.

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