If, Like Many Others, You're Hesitating About Going Public, Scale This Way Instead. Remain private as a business, and scale that way. The outcome will be a good one.
By Erik Huberman Edited by Dan Bova
Opinions expressed by Entrepreneur contributors are their own.
The American business trend of building out to an eventual IPO (initial public offering) is changing: Companies such as Uber, which Fortune ranked No. 1 of the 25 most important private companies, are opting to remain private -- and for good reason: When you've worked hard to create a successful business, the pride you have in running things your way and building customer relationships at your own pace are big reasons to keep things private.
Related: 10 Questions to Ask Before Taking Your Company Public
But maybe you do have a long-term goal of continued year-over-year growth toward a possible future IPO. After all, an infusion of cash that big and a shift of risk to the public can be hard-to-resist temptations.
Yet an IPO can also mean sacrificing control of your company, increasing the focus on quarterly earnings to satisfy investors and -- most alarmingly -- jeopardizing the existing customer satisfaction you enjoy.
A fair trade? Absolutely not. So, instead, consider the following key considerations to stay private but also keep growing.
Private or bust
While the number of U.S. companies continues to increase, there's been a 45 percent decline in the number of companies that are traded on stock exchanges since that number's peak 20 years ago. Some public companies have even rescinded their public offerings and returned to private ownership.
Having worked with both publicly traded and private companies, I've seen stark differences in each type's interactions with consumers and decision-making processes. And I've seen the rise in restrictions that public companies -- centered on those quarterly goals -- now face. To illustrate, an astounding 55 percent of public company CEOs will pass on an attractive investment project if it threatens their quarterly earnings targets.
This is why I advocate building a business you feel passionate about and avoiding the financial games. Grow it, pass it on to family members or those who've been part of the journey or sell it when you retire.
Related: Go Public or Stay Private? The Endless Debate, Continued.
So, how best to do that? If your goal, like mine, is to remain private but continue to grow, here are three tips for creating an effective succession plan:
1. Appoint a trusted successor.
Choose someone who understands your mission and the pitfalls of going public -- maybe a family member or a trusted long-time co-worker.
Volkswagen is a billion-dollar, family-owned private business that now owns Porsche, Bugatti, Lamborghini and Audi. While the owners may quarrel, they've kept those issues within the family for 80 years! This accomplishment is rare; only 3 percent of businesses make it past the fourth generation.
Whomever you choose as successor, start early. Rotate this person through all parts of the organization to develop a comprehensive understanding of day-to-day challenges. Share your overall strategy to create a smooth transition.
2. Raise debt, not capital, to increase market share and money.
Even with $600 billion in outstanding small-business loans in the United States, countless entrepreneurs still don't know how to acquire one. Most private companies incur debt to grow, partnering with banks instead of relying on investors or crowdfunding. A client of mine raised money from a bank to finance product growth, using a line of credit instead of equity financing.
Before going to a lender, you need to know why you need the money, be able to articulate what you're trying to achieve, estimate how much the loan will cost and be able to predict how much profit you can expect in return. Be pragmatic when you calculate the figure needed to cover your investment costs, to help determine your budget and whether a loan is the best option.
Bring your profit/loss and tax statements as well as your personal credit score to the meeting. And give yourself plenty of time to secure the loan; the process can take several months.
3. Remain customer-focused.
The biggest mistake I've seen public companies make is prioritizing profits over customers.
After going public, Groupon shifted its focus from helping small businesses promote their products to pleasing its investors. Not surprisingly, since 2010, Groupon has experienced a net income loss and back-to-back quarters of flat user-growth.
The lesson here, then, is: Continue challenging yourself, and grow customer relationships by stepping into your clients' shoes and asking yourself what your product, service or industry can give them. Don't be afraid to ask about their current frustrations as you work toward a solution.
Related: 6 Reasons Smart Entrepreneurs Think Twice Before Seeking an IPO
Try to anticipate market trends and what your customers' needs will be three, five or even 10 years out. And join the 42 percent of private companies saying no to IPOs. If you stay focused on your client and on growing your business, you won't regret never having taken it public.
