Exit Option Six: Create an IPO

The exit route marked ‘IPO’ or Initial Public Offering occurs very rarely but attracts the attention of business owners amenable to a sale to a third party for two reasons:

  1. The valuation of the ownership interest is usually higher than in any other form of transfer—including the sale to a third party
  2. An IPO brings with it an infusion of cash (from a pocket other than the owner’s), which often propels the company to a new level

But an IPO is an Exit Route that some business owners choose in order to keep the business while assuming the role of a passive investor.

Not surprisingly, the advantages of the IPO include:

  • High valuation on ownership interest and
  • The business owner is attracted to the cash infusion that will follow an IPO

Unfortunately, the IPO option is not without significant disadvantages. The primary one is that despite the high valuation placed on and paid for an owner’s interest, the IPO is not a liquidity event for the owner.

An owner’s interest is exchanged, at closing, for interest (shares of stock) in the acquiring entity. The owner is typically prohibited from cashing out these shares until a prescribed future date. Also prescribed is the rate at which the owner can sell his new shares. And last, but certainly not least, when the former owner does sell his shares, the price per share varies (often significantly) from the price at closing.

Not only is the closing a non-event from a liquidity standpoint, it is also a non-event from a departure standpoint. In most IPOs, the owner is required to stay on with the acquiring company. Staying on is difficult because the former owner is no longer in control. She may still be the CEO, but she is accountable to shareholders, analysts, the Securities and Exchange Commission and more.

Finally, an IPO creates a public company. As such, it is subject to reporting requirements and must uphold fiduciary responsibilities not required in privately held companies. Many business owners chafe under these additional requirements.

To summarize, the disadvantages of an IPO are:

  1. No liquidity at closing
  2. No exit at closing
  3. Loss of control and
  4. Additional reporting and fiduciary requirements

In our next blog, learn about Passive Ownership as part of your Exit Route options.