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Burnt Offerings?

It's understandable to be bedazzled by the riches you see in other companies' IPOs. But before you follow their lead, make sure your company is cut out for going public.
July 1, 1999

Oh, what might have been...were it not for an initial public offering. Strange as this may sound, in many cases, it's true. You hear it all the time: "Going public is an incredible drain on management's time," but such a warning often gets passed off as just another dollop of prudent yet obvious advice that, like all other prudent advice, is forgotten in the quest for IPO riches. Yet the fact remains: When entrepreneurs are forced to take their eyes off business operations to deal with the intricacies of an IPO, it can have disastrous effects for all involved.

Art Beroff, a principal of Beroff Associates in Howard Beach, New York, helps companies raise capital and go public.

Public Peril

Consider the tale of Microleague Multimedia Inc., once a hotshot little company that traded on Nasdaq's SmallCap market, now a has-been that's left behind a trail of broken dreams, stilted careers and shareholder losses.

The company had a promising beginning; it was seemingly pulled out of thin air through a series of deals orchestrated by Neil Swartz, an able, engaging entrepreneur. By 1996, Swartz had built a company with $5 million in sales and four business units that developed multimedia software, primarily for the sports and entertainment markets. This momentum enabled Swartz to put together a $5 million IPO in May of 1996.

The bloom started to come off the rose just three months later, however. In its first earnings release as a public company, Microleague announced that its forthcoming title, Sports Illustrated Presents Microleague Baseball 6.0, upon which the IPO had been largely predicated, would be delayed. The product was delayed again in the fall. Meanwhile, Swartz was spending more and more time soothing ruffled investors and trying to put together deals that would help the company make up for lost time. By 1998, Microleague was headed toward Chapter 11.

"There's no doubt about it: I left the operations to others and spent a lot of my time with investors," says Swartz. "If I had concentrated my efforts on continuing to build the business, it might be a much different story today."

Swartz, who is now a principal with MCG Partners Inc., a merchant banking firm in Boca Raton, Florida, is drawing on his experience to help other companies avoid the pitfalls he ran into in the public equity markets. According to Swartz, "Some companies shouldn't attempt an IPO in the first place because they don't have the ingredients to succeed as a public entity." So the question remains: Should your company be on an IPO track, or will you make the most money by staying private? Here are some acid-test questions to help you find out:

The sad fact is, except for biotechnology companies and, of course, Internet companies--which break all the rules of conventional finance--nobody wants to pump money into a company only to learn a year later that it needs still more to achieve the goals it claimed it could reach with the first infusion of money.

The Final Analysis

On the issue of whether to go public, Swartz says, "The best offense is a good defense." Without the right ingredients to take your business public, it may not be worth the toll the action will take on your company. Remember, riches still await those who sell their businesses to larger corporations, and the likelihood of executing such a transaction increases if the business has been carefully nurtured by a hands-on entrepreneur who hasn't been distracted from producing strong sales and earnings growth.

David R. Evanson's newest book about raising capital is called Where to Go When the Bank Says No: Alternatives for Financing Your Business(Bloomberg Press). Call (800)233-4830 for ordering information. He is a principal of Financial Communications Associates in Ardmore, Pennsylvania.