Family-Owned Business IPO?

by Davis Wright Tremaine LLP

A family business does not go public. Going public and sharing ownership with the rest of the world is the opposite of what a family business is striving to do.

But the Modesto Bee reported earlier this week that Taggares Agriculture, an Othello, Washington-based, agricultural, family owned business is going to do just that. Taggares is seeking to raise $48 million through a public stock offering and hopes to be listed on the Nasdaq stock exchange. In doing so, it is following in the footsteps of some of the most successful family businesses, including Wal-Mart Stores (the single largest corporation in the world), Ford Motor Co., Comcast, News Corporation and HCA Holdings.

Admittedly, this list represents some of the biggest, most successful family-owned businesses in the world. But the Taggares announcement suggests there may be benefits to a public offering for strong and successful – but less than stratospheric – family-owned businesses.

The first and biggest advantage is the infusion of cash into the company that could not be achieved through private investments. A public equity financing can raise a substantial sum of money, depending on the value of the business. And sometimes this level of cash is just what a company needs to get its business to the next level.

Having publicly traded stock also means that the company can use its stock as a form of currency with its employees, its vendors and other business partners. Just because a company has had a public offering, however, does not mean that all of its stock is freely transferable – but it does break down the vast majority of the barriers and it provides a verifiable value to each share of stock. Similarly, having conducted an initial public offering, it is substantially easier to conduct “follow on” offerings, in which the company can issue additional shares to the public. Having the option to go back to the public to raise more funds as necessary is a large advantage to a company seeking financing.

Functioning as a public company also has several indirect benefits. For example, it almost always raises the stature of the company and increases its brand recognition – just by being listed on a stock exchange. Also, because a company must present regular financial reports to the public once it has conducted a public offering, this almost always means greater internal controls.

Additionally, conducting an initial public offering is not necessarily as difficult and onerous as it has been in the past. In the wake of Enron, WorldCom and other financial scandals, the Dodd-Frank Wall Street Reform and Consumer Protection Act added several layers of protection, transparency and reporting onto the existing obligations of public companies. Many observers agreed it became much more difficult and expensive to go public or stay public, so fewer companies conducted public offerings and many companies “went private”. But with the Jumpstart Our Business Startups (JOBS) Act, the government has attempted to address this and has eased some the requirements for companies with revenues less than $1 billion. These smaller companies falling into the categories of “Emerging Growth Companies” and “Smaller Reporting Companies” enjoy several exemptions. For example, they need to provide only two years of audited financial statements instead of three, they are not required to provide selected financial information in the Form 10-K, they do not need their auditor to attest to their information, they can postpone compliance with US GAAP, and they do not need to comply with the “Say on Pay” or similar votes about compensation.

Just as important as all of these advantages combined, though, an Emerging Growth Company can submit all its initial public offering materials to the SEC confidentially before completing its offering. This way if there are any problems or the company elects to back out, it does not suffer the reputational damage another company might suffer.

Most family owned businesses are familiar with the disadvantages and down-sides to a public offering – losing a substantial level of control over the business, the loss of privacy and the time and cost of the offering and the ongoing compliance with disclosure and other requirements, to name just a few. And, for the majority of family-owned businesses, these disadvantages clearly make a public offering a bad idea.

But for a minority of family-owned businesses that have reached a certain growth threshold, require an infusion of new capital to grow to the next level, and are otherwise prepared to be in the spotlight, a public offering presents many advantages and has been made easier under the current laws.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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