THIS IS MY 61ST BLOG ON UNDERSTANDING MONEY TOOLS
In this blog let us venture into the arena of taking a
company public, and some ways of doing so.
Why would you want to take your small company public? We have covered reasons in the past,
but let’s recap. Money! You hope that your successful company will have the
stock priced many fold from being a private company. In this blog we are mainly going to cover shell or shelf
companies as an alternative vehicle in going public.
I’ve been through the arduous task of taking a company
public from square one when I was a manager of corporate finance with
Energetic, Inc., a successful oil and gas exploration and development company.
We worked with some of the best in the field to do so; Rothschild, Inc. in NYC,
as the lead investment banking institution, a very fine accounting firm, law
firm, large banks, and a stable of several hundred wealthy limited partners to
come in as shareholders. The process is very time consuming and expensive. In
this situation it took about 4-5 years to build and position the company to do
the initial stock offering.
Most small companies don’t have the amount of money we spent
going public or the time frame. One alternative is finding the right fit with a
“clean” shell or shelf company. Let’s define what we are talking about. A shelf
company is a public company that has been structured to go public, or has been
a public company and the corporate operations no longer exist, but the
structure does. These shells are offered by law firms, accounting firms and
businesses that focus on this.
These days you can go to Google and up come businesses that have a
supply of shells. As with any
business check out whom you are dealing with, and only deal with well reputed
firms.
Why look into this way of becoming a publicly traded
company? There are several
reasons, amongst them is that initially it is less expensive. A clean shell
with some stockholders already exist, and less hassle than the entire normal
procedure.
What are the pitfalls of a shell corporation? There is no
free lunch. The shell normally has stockholders looking for the right type of
company to merge into the shell, but they can be very selective regarding
industry and upside potential.
Automatically, you are going to lose a significant amount of stock to
these shareholders and you need to determine whether it is worth it in the long
run; what is the cost to you? A
publicly traded corporation is of little value without one or more aggressive
investment firms behind your company to promote the stock so that it goes up in
value and receives attention.
Prior to all this you want to know where you want to head
with your company, will it be regional, national or perhaps looking for growth
of value and then selling out to a major corporation and taking their stock in
turn for yours. Perhaps a combination of cash and stock.
Looking at shelf corporations these are a few essentials to
look at:
- A
certificate from the state which is in good standing.
- Certified
articles of incorporation from the state.
- Have
all state fees been paid and current?
- What
other things does the shell bring to the table, like stock certificates?
- How
many shares of stock have been authorized, issued and recently traded (commonly
called the “float” or stock being available for trading)? Sometimes a person
will sell stock for essentially nothing, let’s say $.01, to take a year-end
write off against profits made on another stock transaction.
- How
many stockholders remain in the shell?
Who are they?
- Many
times more stockholders are better than few as it gives diversification. With a
new company doing business these stockholders may be your best market for more
stock buying supporting the stock price.
- Can
the shell be registered in all states under Securities and Exchange Commission
regulations? Some states are more restrictive than others, like California.
- Is
there an investment banking firm relationship in place with the company
sponsoring the shell?
- Is
the sponsor related to a public relations firm specializing in financial press
releases?
Place a good securities lawyer on retainer to represent you
through the process; best money you will ever spend.
As with any company interested in this type of venture have
audited financial statements from a recognized CPA firm completed on your
company. Above all with your
company, be conservative and have a healthy cash flow. Cash is king. You only
get one chance at this, you can’t go back to the well if you miss your
projections; your stock value and interest in your stock will die. There is no,
or little, bank financing available and factoring of receivables to maintain
cash flow can be quite expensive.
Bottom line for you and your company prior to proceeding
with a shelf corporation:
- Know
your product.
- Know
your market.
- Be
in a rapidly growing industry.
- Have
a strong management team and story to tell.
- Industry
competitive edge.
- Macro
picture for the future of your company and solid, realistic pro-forma
statements.
- The
company needs to be strong throughout. Due diligence will bring out weaknesses
and non-disclosures.
- The
shell corporations are looking at many business plans and ideas. In today’s
fast pace business environment these people are doing the initial reviews off
cell phones and I pads. The key for you is to get attention quickly and doing
it concisely. Hit the salient points and attract attention, you only have one
shot. If the company is interested and contact is made you then need to have a
complete business plan available, including pro-forma for presentation.
Normally, people who hold stock in these shells think like
venture capitalists. They want industries that sizzle like high tech/bio-tech,
and growth of 30-50% a year.
So much for shelf companies. Another way to go public is to
find a company with a product that matches where you are heading with your
business. The best way to describe this is to give you an actual example. In 1985 I and four other people got
together with contacts in the gas retail business including major corporations
like Amoco and Shell Oil. These two companies wanted to start an ongoing
service/insurance business for on-road maintenance issues and monthly follow up
with customers at their retail stations.
We started Amoco’s Certicare program and Shell’s Autocare program both
run out of our office.
At that time, small in-house computer usage for storing
information was just beginning. We wanted proprietary computer hardware, and
then have our people design the appropriate software. We found a floundering
public company on the East Coast in the gaming business called Game-A-Tron. In
this case, we bought the company at “the right price”, and were able to merge
our other ideas into the company, changed the name and were publicly traded
with an exciting story to tell the investment community. This included major
companies under contract for business.
We contracted to the gas retailers/convenience stores inclusive of auto
repair. The contracts with retailers included our computers, software and
training as a package to track the customers, do monthly mailings and
monthly/year-end financial statements.
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