Many successful family businesses have made the decision to become publicly traded while still maintaining a controlling interest within the founding family. Since family controlled companies represent approximately one-third of both the Fortune 500 and the S&P 500, it is logical to conclude that funding from the public markets is a useful strategy for some family firms. In fact, some of the most famous family business names, such as Ford and Nordstrom, have taken this path.
Initial public offerings (IPOs) have been used successfully to fund growth and provide liquidity in conjunction with ownership structures that provide for control to be maintained in the family. While the current recession significantly reduced the appetite for IPOs in most markets, as the economy improves so does the expectation that IPOs will once again become popular. However, before a family business decides to trade any portion of its shares in the public markets there are several important issues to consider.
Of course, the help and advice of excellent attorneys, accountants and investment bankers is critical to any successful offering. Yet even before engaging experts to take their company through an IPO process, business owning families need to have open and honest discussions regarding how even the smallest portion of stock in public markets can drastically change the way they do business. Here are some issues to consider:
- When your business becomes a publicly traded company it will be subject to a wide range of regulations, reporting requirements, and scrutiny that you and your management team may not be familiar with or comfortable in performing. Even with structures in place to preserve family ownership voting, the responsibility to meet SEC and other regulatory requirements can be onerous for many. In a very real sense it ceases to be your company, your capital and your decisions, even when it represents the combined wealth of your family. While perhaps a dramatic example, it has been argued that some of the business practices that led to fraud convictions for members of the Rigas family (Adelphia Communications) would not have been illegal if the stock had not been publicly traded.
- Those who buy your stock may have very different interests from you and your family. Today’s public markets are largely driven by traders not investors and they do not share the “patient capital” perspective that has traditionally represented the strength of family business. Their desire for timely returns on investment can represent a major conflict with the long-term planning and next generation focus of family owners. Under existing legislation, an owner of as little as 3 to 5 percent of a public company has significant rights that impact corporate governance. Both Barnes & Noble and the New York Times have faced challenges from these types of conflicts of interest, at considerable costs in both money and the time of leadership.
- In addition, the rules keep changing for public companies. In our post Enron/Lehman Bros. world the costs of being a public company have increased significantly. Smaller firms that once found IPOs a great source of capital now must carefully consider the “carrying costs” of public filings and the professional services needed to meet these requirements.
The very nature of public markets drives decisions that have short-term pay-offs. While good corporate governance theory maintains the importance of long-range results, efforts to incentivize, regulate and monitor such decisions have met with mixed results at best. Once a family business becomes publicly traded it may find that the very values that made it successful are under attack.