Scott Barnett & Associates Blog
Going Public

November 12, 2019
Are you ready for riches beyond your wildest dreams?
Can you imagine your friends seeing you being interviewed by Kelly Evans on CNBC? Is your ego unsatiated in its hunger for recognition and adulation? Are you a "take the money and run" person who is managing her own little "pump and dump" scheme? If so, you may be ready to go public.

On the other hand, if you don't much care for the idea of spending a third of your time holding the hands of institutional investors who have reluctantly bought your story, you probably should not.

If your idea of fun does not include answering questions at the annual shareholder's meeting from John Smith, the 82 year old retired machinist from Cleveland who bought 10 shares of your stock and thinks that makes him Carl Icahn, you probably should not go public. If, God forbid, your company gets in trouble and results decline and the specter of several Bill Ackerman wannabes asking for your head does not float your boat, you probably should not be public.

Of course, this decision may not be yours anyway. It may be part of the "exit strategy" of whatever venture capitalist or private equity firm is backing you. If so, you don't have a lot of choice or say in the matter. You're better off to shut up and drive…

The road is littered with restaurant companies that unwisely made the decision to go public and their names are well-known- Planet Hollywood and Chi Chi's come to mind. But I also include Morton's, McCormick and Schmick and many others in that group. Most of the publicly traded chain operations in existence today should not be public.

I once saw the then-CEO of Ruth's Chris speak at an industry gathering. He made the statement that "virtually no restaurant company should be public unless they are fast feeders." This was when his company was public at the time.

Not long after that speech, he was gone.
It's important for prospective public company CEO's to learn a word called litigation. Chances are they will have to become very familiar with it. Just ask Groupon, the company that had to restate its earnings after their IPO. They were insufficiently conservative in how they treated return rates for some items and they are still settling the various lawsuits brought by various groups eager to cash in on their legitimate mistake.

The problem with being public boils down to a few issues:
* First, the investment community is notoriously short sighted. Your latest (or next) quarter is their primary concern. The fact that you have hurricanes, union strikes or anything else makes no difference when looking at earnings per share and the multiple thereof. A bad quarter or missing estimated earnings can send your stock (and your career) to the cellar overnight.

* Second, the company will have institutional investors that think they know what it takes to "take this brand to the next level." That they have had nothing to do with it until now is irrelevant since they have a Wharton MBA and are quietly confident that they have forgotten more about business than you will ever know.

* Third, a public company CEO must spend an inordinate amount of time cultivating and pacifying these institutional investors. He must make them feel important, convince them that he actually cares what they have to say and generally politic them. If he does not do this... Well, he better be the next Steve Jobs. Oh, and little things like running the business. Don't forget to do that as well.

* Fourth, unless you are a billion dollar (or more) company, the costs of being public may make it impossible. The reporting, filing and disclosure requirements in the US are very onerous. Some people do not have a problem signing their name to SEC documents where they are trusting that a number of people in their company actually are honest and know what they are doing.

* Finally, there is the matter of just who is working in your company. Are they the type that can think on their feet and not give out the wrong information in an innocuous interview? Are they a little "unusual" and don't present well? Will their persona inspire confidence in the white bread Ivy League cadre of analysts and portfolio managers?

What is truly maddening about all this is that if you are smart enough to appreciate all of what I just said, you are probably the right person to run a public company. As they say, you knew the job was dangerous when you took it.
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