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Considering the Necessary Preparations for a Public Exit

By Peter Traynor, ITB Solutions

Entrepreneurs who have had the benefit of early stage investment, beyond friends and family, from angel groups have typically had the unique experience of feeling an ongoing deep sense of both gratitude and, frankly, obligation to these investors. The knowledge that the decision on the part of the angels to provide much needed capital at an early stage was not just a benevolent act, but an ardent (and reasonable) expectation of a return on capital, can keep good-minded business owners up at night with concern for the shareholders who helped them when they needed it most.

It’s every entrepreneur’s dream to build a successful business and reward the people who put their faith in you. With that in mind, there are things you can do to help make that reward happen – and facilitate the exit that the angels are looking for.

What Are the Possible Exits?

Aside from going the “M&A” route and selling or merging the business with a suitable acquirer, many business owners owe it to themselves and their shareholders to explore the option of going public and obtaining a financing in the capital markets.

For those who may think that they are too early stage to take advantage of the public markets they should look to the Canadian Securities Exchange (CSE) as an option. They call it “the Exchange for Entrepreneurs” for a reason: Not only is it a low cost, fully regulated public market for smaller companies, but it comes with all of the advantages that the Toronto Stock Exchange environment would offer, with significant advantages over the Toronto Venture Exchange.

The CSE has been growing in popularity for the past several years primarily for its reputation as a no-nonsense stock exchange that does not addle its issuing companies with undue regulation and high fees. Which makes it the perfect answer for smaller companies that are trying to get to the next level by accessing the capital markets.

What Can I do to Help?

As an entrepreneur you are accustomed to leading the charge, wearing many hats, and making things happen. The going public route is a course that requires you to do a fair bit of learning before acting. There is much you can read in order to start getting up the learning curve. However, one of the best ways to help is actually NOT to lead the charge, and instead find advisors you can trust – and then trust them to get you there.

The over-riding principal is that you do not want to be standing in the way of a “liquidity event”. And there are several ways that entrepreneurs might unwittingly do this.

The Valuation of the Company

This has to be the number one issue that can torpedo a potential transaction. Making unreasonable and unsubstantiated over-estimations of the value of your business is a typical mistake made by many entrepreneurs. This can be as disastrous as it is common. There is a marked tendency on the part of founders to value their company on the basis of what they see it becoming as they travel on, what they see, is an inevitable path to success. Professional investors in the capital markets – such as registered investment dealers – are not so convinced of that “inevitable” outcome. There is always risk in any business venture – and that risk will be built into the ultimate valuation that will be established by both tried and true methods, and then negotiation.

I recently spoke to an entrepreneur who had boot-strapped his innovative technology firm over several years to the point of solid but modest revenues and break-even financial status. He wanted to raise equity capital to get to the next level, and I asked him what he felt his business was currently worth. I had barely finished asking the question when he said, declaratively, “$20 million dollars”. This man was not a fool, nor does he have delusions of grandeur. He merely made the mistake that many hard-working entrepreneurs who have built something of value through blood, sweat and tears make. What he meant was that he could see his company as being worth $20 million in the foreseeable future. Right now, it was realistically more like $5 million. But sticking to that $20 million dollar valuation would have guaranteed that he would never get financed.

Other ways that entrepreneurs can stand in their own light include:

- Failing to Focus on the business during the go public transition;

- Being too close to the situations and exercising poor judgement;

- Being conflicted about the company’s current shareholders versus the interests of the new shareholders;

- Being the “bad guy” during negotiations – you must leave that to your advisor. You have to be the “good guy”.

Necessary Documentation

A very effective activity for a CEO to undertake that will assist greatly in the go public process is to ensure that the necessary analysis and documentation has been prepared.

Necessary documentation includes:

- An executive summary that concisely introduces the company and elaborates on a high level what the value proposition is;

- Current and historic financials (preferably audited);

- A strong Powerpoint presentation – no more than 15 pages;

- Comprehensive “Due Diligence” materials.

Taking that Next Step

Finally, going public can be a challenging but exhilarating process for you as a business owner. It takes determination and even courage to embark on the journey. But for those founders who are determined to take their business to the next level and give their loyal shareholders an opportunity for a rewarding exit, it can be the right course of action.

If you want to have a word with someone who can introduce you to the public company experience please feel free to contact us.

ITB Solutions is devoted to assisting private companies with accessing the capital markets in Canada. ITB Solutions brings a full range of services that empowers businesses, whether public or private, to achieve all of their milestones required to access financing and if desired become public. Since 2005, ITB Solutions has provided listings development services to the Canadian Securities Exchange. CSE is the first new stock exchange approved in Canada by securities commissions in over 70 years and has also been designated by the Federal Department of Finance as an eligible stock exchange for RRSPs and TFSAs. We assist companies with the listing application and managing the process to become publicly tradable on CSE, as well as offering advice on how to make the most of your public listing. We also assist the exchange in marketing to potential public companies worldwide. For more information please contact Peter Traynor at 647-500-0493 or by email at peter@itbsolutions.ca

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