Becoming a public company in the U.S.capital markets may significantly increase the value of your company and thus your personal net worth. It has been reported that sellers of private companies generally sell their business at an average of 3 to 5 times net after-tax earnings. Further, many times the seller must finance the purchase. It has also been reported that stock of a public company may sell for 10 to 20 times earnings.
For example, assume your company has annual after tax earnings of $5,000,000. At 5 times earnings, your company’s value would be $25,000,000. But finding an all cash buyer at this amount could be quite difficult. As a public company, if your stock trades at 15 times earnings, your company’s value would be $75,000,000.
All this is very nice. What’s not so nice is this half truth: Going public in the U.S.capital markets is an excellent exit strategy for you to cash out and make your fortune. It may be, but not so fast. Here’s the rest of the story.
First, as a legal matter, the SEC has rules that severely limit the amount of stock you personally can sell into the market at any one time. These are called Rule 144 restrictions.
Second, as a practical matter, you cannot sell lots of your securities into the market in any short period of time. It will screw up your stock price and make your investors mad. The market will worry that your company is in trouble if you start to dump too much of your personal stock.
To make a real “exit,” you may have to wait until some other company wants to buy your company by buying your stock. This is a good strategy because, as we discussed above, you have made your stock much more valuable and thus can sell at a much higher price by becoming a public company in theU.S.capital markets. So yes, going public in theU.S.capital markets is an exit strategy, but the whole truth is: You must think of it as a longer-term goal rather than a short-term immediate wealth-building exit strategy.
Check back again next week for another Going Public Half Truth.