Are you ready to go public? - public ownership; includes list of informational resources

Nation's Business, Jan, 1995 by Roberta Maynard

Asuccess story like Boston Chicken's is the stuff that dreams--and fortunes--are made of. But success in the public arena is not limited to blockbusters. In fact, some small firms may be candidates for public ownership without knowing it.

Why do companies go public? What are the advantages of tackling the arduous and expensive process of an initial public offering (IPO)? Are the gains of going public worth the loss of control and privacy?

In an IPO, shares of common stock are first offered for sale, either in an over-the-counter market or on a stock exchange. The principal benefit is the potential for increased working capital. Among the other benefits are enhanced visibility, increased market value, and improved liquidity.

A New York City manufacturer of bridal gowns found that the higher profile his company achieved after it went public helped attract top talent. Jim Hjelm's Private Collection, Ltd., which went public as a start-up in 1987 with a single line of upscale creations, has since added four more lines and hired a second designer. The initial sale of $1 million worth of stock laid the groundwork for growth.

"We felt that the market was very hot and interested in new issues," says Joseph L. Murphy, the company's president. "It seemed like a good way to raise money quickly without having to depend on a few financial backers." In 1994, the company had revenues of $7.5 million and earnings of about 12 cents per share.

Determining which companies are likely candidates for going public is made by underwriters, or investment bankers, who market stock and manage IPO transactions. Some look for "sex and numbers," a hot idea likely to send the stock skyrocketing. These underwriters specialize in more-speculative deals or emerging companies with long-term potential, such as DynaGen, Inc., a biotech company in Cambridge, Mass. DynaGen has no profits, scant revenues, and a product that cannot be marketed yet. But it hopes to have a winner in NicErase, a smoking-cessation drug it developed.

Knowing that it would take several years to get U.S. Food and Drug Administration approval of NicErase, the company opted to go public to raise capital needed for research and development. In three stock offerings and two equity sales to private investors, it has generated $23 million.

At the other end of the spectrum are established companies that have demonstrated solid, sustained growth. These are also IPO candidates. Underwriters attracted by such companies look for these characteristics:

* A strong earnings record.

* Three to five years of audited financial reports.

* Growing markets.

* Solid management, including a strong board of directors.

"The two most important qualities we look for are quality and integrity of management and a track record of three years of steadily increasing sales and earnings," says Barbara Boyle, a vice president of A.G. Edwards & Sons, Inc., an investment banking firm in St. Louis.

Above all, underwriters are interested in companies with a story to tell, such as that of the Blue Whale Moving Co., Inc., in Austin, Texas. Blue Whale's story is simple and easily marketed: The company provides exceptional service. Its success brought it national publicity and business awards, including designation as a 1993 honoree in the Blue Chip Enterprise Initiative program for small businesses, sponsored by the Connecticut Mutual Life Insurance Co., the U.S. Chamber of Commerce, and Nation's Business.

Though the company is small--68 employees and revenues of $2.1 million--underwriters were attracted by its story and by its 50 percent annual growth since it was established six years ago. Underwriters began beating a path to Blue Whale's door. For a time, the company was getting a dozen calls a day from people wanting to invest.

In that regard, though, Blue Whale's experience is an exception: Usually it is the small firm that must seek out advisers, not the other way around. In addition to an underwriter, a firm planning to go public needs a securities attorney, an accountant, and a financial printer, who prints the documents to register the offering with the Securities and Exchange Commission (SEC).

The accountant should be brought in at least a few years in advance to lay the financial groundwork for the IPO. "The most common accounting problem of companies wanting to go public is that their accounting records are not in good enough shape to pull from them two to three years of audits," says Les Thomas, a CPA and a partner in the Costa Mesa, Calif., office of the Price Waterhouse accounting firm.

Small firms trying to save money typically structure their accounting to minimize their profits and ultimately their taxes. But a company planning to go public, experts say, must do just the opposite with profits: It must show potential investors a strong record of profit growth in the years just preceding the IPO.

Though the accountant is important, the cornerstone of the IPO process is the underwriter, who manages the deal and provides expertise on valuation and pricing of the stock, on market and industry conditions, and on the timing of the offering. The underwriter also provides support for the stock after it is issued.