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How to Go Public Without Losing Your Shirt (Part 1 of 3)

Everyone has heard of those who made it big by going public. But what about you the business owner with a small to medium sized, profitable business? Too small to go public, not enough money or management time to deal with it all.

In most SME businesses the only way for the owner to generate cash from his or her ownership stake is to sell the entire business. When you sell a portion of your business to an investor, that money is expected to stay in the company for expansion and growth, not go to buy you your next car, boat or house!

First, it is worth exploring the problems facing small to medium sized businesses Startup is exhilarating fun and exciting, but if the business is not going to die it has to evolve into a more ‘grown up’ form, and at this point a lot of the joy gets sucked out for a lot of entrepreneurs, they often fail at this point, move on to the shiny new thing, or get stuck in a desert of mediocrity for years. These business owners are often award winning, highly talented, leaders in their field, so why do they get stuck, how do they break out of the desert? What are the challenges that hold these businesses back?

The challenge of business growth

Some of the issues small and medium sized business face are;

The Problem of Scale, this is well known to most entrepreneurs you need to be big, to get big. Landing the biggest margin juicy contracts often needs you to be big enough to handle them, so while you might have the expertise that no one else does, you often find the dominant market player picks up the contract and subcontracts to the specialist to actually get it done. Remember the old Adage in the 1990’s for IT procurement managers, that ‘no one ever got fired for choosing IBM’, basically saying that stick to the big safe supplier and even if it goes wrong, at least you can safely point the finger at the supplier and not the procurement decision. Scale not only affects growth but also valuation, big business is just worth more than small businesses.

Succession, Entrepreneurs are often integral to the business and when it comes to an exit they often get tied up in legal knots to retain them, often meaning they can’t get their hands on the exit money for years, or creating a huge risk by paying them off so they leave and most of the drive and passion leaves with them. So how do you safely transition in future?

Demographics, this is really prevalent in the mature economies that have the demographic cliff looming, like the US, Canada, UK/Europe, Japan, Singapore, Australia etc. in these countries the baby boomer generation started businesses these are often solid profitable and successful, but whereas in previous generations there was always a wave of new blood to come and acquire or take over the running of these businesses, for the first time in history the next generation is smaller than the last, and what’s more the barriers to a start-up a business has dropped to almost nothing, so why buy a business if you can start one and compete almost instantly? this means that literally millions of small to medium sized businesses are going to find themselves without succession and without buyers, too small for the larger players to buy and too good to simply close down.

Business Demographics

Liquidity, the ability to buy and sell your shares, this might seem a little strange at first, not a challenge you necessarily thought was a challenge, but it is a huge driver of shareholder value, public listed shares often carry a premium for their liquidity, and for most entrepreneurs the exit is a ‘binary’ choice, they sell or they don’t sell, if they take on an investor they have to show a strong business case for the use of the money, they can’t just go and buy a Porsche.

Wealth and value creation, as a business owner, how do you create the best value and wealth from your business, do you sell, do you leave it under management? a lot of people, myself included had good businesses that were ‘keepers’ back in 2007/2008 that simply don’t exist anymore, but you also don’t want to sell too early, what if next year you get all those contracts that you have been saying you will get next year for the last 5 years? The biggest issue with wealth creation in business is that only 20% of business actually create any wealth for their owners (the rest cease to be) and of those they don’t normally achieve much more than a return on capital (sweat equity in most cases) so if you added up the man hours contributed and added a risk-adjusted return on capital that is probably what you have achieved for all the blood sweat and years you just gave up, it is not just an idea, it is economic fact (ask an economist) in a free market businesses find an equilibrium where profit basically boils back to a risk-weighted return on capital so the very free market that allows you to start up so easily also makes it very hard to break out from the momentum of mediocrity.

Global expansion – having strong international markets and business is a great way to reduce risk and therefore improve valuation, but opening up in a foreign country is a minefield, and can be an expensive time consuming and hugely risky and distracting.

Portfolio Approach – we all know we should not keep all of our eggs in one basket, but entrepreneurs feel forced to, they have their shares in their business and that is it, for better or worse, and often this business will be taking the best years of their life, I think we are taught to see that it is all or nothing, that you either ‘hit it out of the park’ or you fail and there is no happy medium.

Access to capital – Raising money for smaller business is really hard, there is a huge sea of capital waiting to be deployed into businesses, but small businesses just are not big enough or de-risked enough to attract it, 90% of all businesses globally are small or medium sized businesses, so it is literally trillions of dollars of investment potential that is effectively taken off market due to scale and transaction costs. When you do get the investment it is not so much with strings attached, more with ropes and padlocks, you have to sell your soul, your dream and your control to the investor.

Receiving Investment

One size fits all: Unity Agglomeration provides a solution to pretty much any of the world’s problems in Mergers & Acquisitions (M&A), and in fact, most of the problems listed above can be fixed by merging companies together and then publicly listing the new group, but let’s just look at some of the issues with mass mergers or ‘Rollups’ as they are sometimes called and then the issues with public listing.

Ego/pride, People don’t want to feel like they sold out, got bought or gave up, they want to see their efforts rewarded with growth and success in their own name.

Talent retention – When companies sell or merge often the first thing that happens is the key people leave, sometimes with the key customers. In SMEs talent is everything, it is often their only USP.

To be continued…in Part 2!

View Part 3 here

This post is based on original material produced by Jeremy Harbour, Chairman of Unity Group. I am partnered with Unity Group to assist companies to participate in the UAG model.