Hey guys,

most entrepreneurs would love to see their business go public and expect that to be the next step. However, there are several reasons for a business to stay as a family business.

Accoring to a NY investment banking and straegic consultancy firm, one in five private companies in the $5 million to $50 million annual sales range that go public regrets it later on.

Owners of family businesses often get caught up in the financial rewards or ego gratification that may result from a successful stock offering and fail to see the difficult realities of becoming and succeeding as a public company.

The ramifications of going public may be difficult to handle for an individual or family that previously had a much freer hand. “It is a big step and the decision depends on the owners’ goals and objectives. If they want to raise capital to expand the business, going public can be a less expensive means than long-term borrowing. But they’ll have the Securities and Exchange Commission and so many other people looking over their shoulders now. For someone who started a business years ago and is used to running it his or her way, it can be very difficult.”

As a public company, the stock is being analyzed, as well as bought and sold, by stockholders who are independent of the company. The price no longer can be controlled. Frequently a few well-organized outside shareholders owning only a minority of the stock can effectively control the company. And going public almost always means some family members lose or must change jobs because of SEC disclosure requirements and the added responsibility of answering to the public about costs.” He said that 8 out of 10 family businesses that go public end up restructuring compensation arrangements.

Family businesses often want to provide liquidity to family stockholders, obtain capital for growth or acquisitions or do estate planning. Owners should explore other means to achieve these goals, such as setting up an employee stock ownership plan; creating joint ventures; turning to the private market, insurance companies or banks for capital; or selling the business. Before deciding which is the right move, the owners should meet or consult people who have already experience in this field.

Before taking their business public, the owners should professionalize it. “They should establish an outside advisory board or a board of directors, which should not include family members, suppliers, customers or the business’s CPA, lawyer or other professional advisers.

Professionalizing the business also means developing a business plan and budget, setting up a compensation plan and rules of entry into the company (with definite education and work experience requirements for family members) and building a management team

Family Businesses Cautioned about going public. Journal article; Journal of Accountancy, Vol. 179, 1995

http://www.questia.com/googleScholar.qst?docId=5000301515

What do you guys think? Would be nice if you could add more sources or information to the Blog.

“Going public has potential benefits and costs for the business, the family, and the family owners.   The business gains more capital for growth and all employees—family and non-family—can benefit from greater opportunities. The higher status of public firms can improve the visibility and reputation of the company and help it find better customers, suppliers, bankers, and employees. The presence of public owners (and their representatives on the company’s board) can help steer the company toward activities and practices that increase the company’s profitability and value. It could very well be that public companies implement more professional management practices. In a public company, family owners will see their wealth increase and have access to greater liquidity and a way to exit the ownership group; conversely, the ownership group can shed owners who don’t support the goals of the business. Diversifying the family’s assets (by selling shares in the public family company and investing in other assets) allows family members to lower their investment risk and increases inheritance options within a family (not all heirs need to receive shares of the family business). Greater wealth and liquidity and the means to reconfigure the business family can strengthen family unity, increase the opportunities and resources available to family members, and improve family performance.

On the other hand, public ownership is suspected of distracting companies from long-term goals and investments, and ultimately of lowering the performance of the family business. The ultimate report card on public companies suggests that they are necessary to exploit certain market conditions but that they are inferior performers (on a number of dimensions) to their private counterparts. By going public, family control over the business is at least diluted; non-family board members join them at the board table and in some cases, the family is in the minority. Experience shows that a family’s identification with a publicly traded business and its commitment to it is more likely to wane over time, resulting in the family eventually losing ownership control of it. This generally occurs because the business grows (in part because of the infusion of the public’s money) beyond the abilities of family members to lead it, family involvement in the business decreases, and the family loses its business leadership roles. We don’t know enough about the impact to a family of losing control of its business; both positive and negative examples abound.

We do know, however, that if their business goes public, the family business leaders, the family owners, and family members must treat the family business in a different way. Family owners, family board members, and business leaders must learn about the standards and regulations of the public market and respect the rights of public owners. Family owners can know more about what is happening in the business than do the public owners, but they cannot act on this information or otherwise manage the business for personal gain, as happened in Adelphia in the US and Parmalat in Italy. Benefits flowing to family members from the business need to be scrupulously monitored to ensure that public owners are treated fairly. To improve the chances that the family owners will be disciplined in their holding of family company shares, and that sales of shares will be orderly and not threaten family control of the business, shareholders agreements are needed. The business family needs to strengthen its unity and develop pride in and stewardship of the business, to counter the ease of exit and the lure of liquidity. Family employees must step up to a higher level of professionalism in the business if they expect to keep up with the growing, financial-performance oriented business, let alone lead it. This entire scenario cries out for strong governance of the business, ownership group, and family.

Going Global

Going global is not always a choice. Sometimes, if a family company wants to stay in business, it must expand its business in this way. But choice or not, going global carries certain benefits and costs, and imposes certain standards on the family and business.

When a family business becomes a global player in its industry, the “game” of the business changes and the requirements facing the management of the business increase.  Global family companies must be skilled at global sourcing of talent and resources, producing for and selling in different cultures, administering across languages and time zones, navigating through different regulatory and legal systems, and managing currency effects on their business—just to name a few of the challenges. These companies generally require more professional management (family and non-family), more sophisticated management systems (planning, budgeting, IT, management development, logistics, etc.) and a capital base often many times what the family business needed before the global move. These higher standards for the family business can both inspire and challenge the family behind the business.

Going Global and Public

These two moves are generally motivated by the desire to keep the family business strong and achieving its potential, with little understanding of their benefits and costs or the requirements they will impose on the business family. A family should go into the new game with its eyes wide open and prepared for its new existence. This new game isn’t for all business families. To successfully implement these competitive moves family employees, family owners, and other family members must step up to new requirements. The family must renew its commitments and efforts concerning governance, family education and family unity. This requires considerable time and effort, and the same commitment to invest in the family as in the business. Some family businesses and business families would be better off if the business remained private and smaller, or was sold if that was necessary to keep the business healthy. But for those families that do make the commitment and investment, the rewards are many. A global business can open up the world to the business family”

To make it more trasparent, look at following advantages and disadvantages for family business going public.

hey this is a very interesting topic.

in my opinion, it depends on the scope of the business. it may or may not improve the companys financial position. GOING PUBLIC MEANS LOSS OF PRIVACY.

and in family business, privacy is ver important.

Also, it will increase the liablity, and competitors can even take with the option of buying shares.

i found an article on family businesses cautioned about going public

please go through

http://www.questia.com/googleScholar.qst;jsessionid=LyJSlk7D2HF622pbr9qJ2TZ1ZhF8gPrhtHhWJh2DD3F3DrntmkNT!-990368196!-1828655400?docId=5000301515