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What can family businesses gain from going public?
Holding an IPO, or going public, comes with many benefits, coupled with a couple of disadvantages as well, for a family business – in which two or more family members are involved, and the majority of ownership or control lies within a family.
Any coin has two sides, and so does this situation; so let us first look at the benefits. For family-owned businesses, the capital generated by IPOs are mainly used to finance potential expansion plans. If it is a small family business, the capital raised via IPO helps it reach the next step – which is increasing operational capacity, funding research and development, paying off existing debt, and even funding capital expenditure. The ability to increase capital would be the most distinct advantage of going public.
Another advantage of going public is the increased public awareness the particular company would get, as IPOs often attract all heads towards them due to the media providing huge publicity to IPOs. This will eventually and effortlessly increase the market share of the particular company’s product. According to Investopedia, an IPO also may be used by founding individuals as an exit strategy, and many venture capitalists have used IPOs to cash in on successful companies that they helped startup.
“Furthermore, because there is an outlet, banks and other lenders are much more willing to allow family members to use their stock as collateral for a loan,” according to Family Business Magazine.
“Respondents noted that creating a public market also gives family members who are not working for the company a way to convert their shares into cash, at a predictable price, from time to time. Once stock is issued publicly, its price may increase remarkably. Outside investors are much more willing to pay a higher price for the stock of a public company than for a private one because of the marketability of the shares, the credibility attributed to public firms, and the openness of a public company’s financial records.”
Having said that, announcing an IPO also indicates letting go of control over the business in many ways. Another disadvantage for the companies would be the need for added disclosure to investors, along with the requirement to meet the regulations and rules put forward by the respective SEC.
“Respondents indicated that the most disturbing change that occurs when a company sells stock is the lost privilege of being discreet,” according to reports.
“The company’s financial position, the identity of its shareholders, and the degree of confidentiality enjoyed by owners and shareholders will change significantly. The salaries, incentives, and prerequisites for family executives will become public information. Documents that contain highly sensitive information, such as sales figures or the salaries of directors, will have to be revealed to public shareholders and regulators as a matter of course, or upon request.”
For smaller family-owned businesses, the costs that will be incurred to ensure compliance with regulatory requirements would be high, which includes funds spent on accounting oversight committees, audit fees, reporting documents, and establishing investor relation departments.
“If a company issues too many shares, an investor, entrepreneur, or competitor can wrest control from the owners. Family owners should retain enough shares so they can continue to elect the company’s directors and determine corporate actions. If more than 50% of the stock will be distributed, the family can try to retain control by selling the shares widely in small lots, but this entails risk; an investor can buy up shares and mount a takeover campaign,” elaborates Family Business magazine.
“As an alternative, family owners can issue only non-voting stock for public purchase. However, these shares appeal somewhat less to investors and therefore usually command a lower price.”
Family businesses that have gone public
IPOs have become popular in the recent past, as about 406 IPOs were announced in 2000 in the US, whereas 2018 saw 1,359 IPOs globally, bringing in more than $ 204 billion, with Asian companies generating roughly 43% of all public equity raised. One amongst the notable family businesses that announced an IPO recently was Levi Strauss.
Although Levi Strauss & Co. began as a dry goods business in San Francisco in 1853, the company claims to have invented the blue jeans 20 years later. It first went public in 1971, but was taken private in 1985 through a $ 1.6 billion leveraged buyout by the Haas family, majority owners of the company and descendants of its founder Levi Strauss. Although a household name in US markets, Levi Strauss & Co. hopes to use the proceeds of a second IPO to expand in China and Brazil, where the brand’s popularity has been slow to materialise, and accounted for less than 4% of sales in 2018.
Evergrande Group is another example. The Shenzhen-based business is owned by Hui Ka Yan, one of China’s largest property developers. With a net worth of more than $ 27 billion, he is considered to be the country’s third-richest man. Hui’s son, Xu Zhijian, is Vice President of Evergrande, whose sizeable IPO value still fell short of the $ 1.5 billion it initially hoped to raise on the Hong Kong Stock Exchange.
Relying heavily on state-owned bank loans and bonds during its early days of expansion, the company viewed its IPO as a mechanism for debt reduction and a catalyst toward a new business model that would improve cash flow and profitability. Competing IPOs from other Chinese developers in similar fiscal positions are considered to have contributed to Evergrande’s uneven IPO performance.
Often called Europe’s Berkshire Hathaway, the Agnelli family’s Italian investment firm, Exor, is one of the region’s largest. The company’s diversified interests include global reinsurer Partner Re, Dutch commercial machinery manufacturer CNH Industrial, professional football club Juventus, and automakers Fiat Chrysler and Ferrari. Although taking Ferrari public had been a longstanding wish of its former Chairman and CEO Luca Cordero di Montezemolo, the move was well-timed alongside a significant appetite for IPOs in 2015.
However, another reason for the IPO may have been to bring the sports car company more directly under the influence of Exor. After Ferrari’s separation from its parent company, Fiat Chrysler, during the IPO process, the structure of the deal allowed Exor to increase its stake, assuming a controlling 33.4% of voting power in Ferrari.
Offering 12 brands from seven European countries, the Volkswagen Group, owned by the Piech and Porsche families, is the world’s largest automaker. Traton is the company’s commercial vehicle division, consisting of MAN and Scania truck brands and Brazilian truck and bus subsidiary Volkswagen Caminhoes e Onibus. Volkswagen‘s decision to take Traton public was partially in response to Brexit, with the company hoping to mitigate poor market conditions and slowing fundamentals in Europe and China.
However, Volkswagen has stated that the capital raised through its IPO will help the company become more competitive, specifically in the electric commercial vehicle market. In 2018, Volkswagen officially unveiled its fully electric distribution truck and its Volksbus e-Flex concept vehicle, with plans of manufacturing and selling both in South America’s growing economic marketplace.
The Ambani family’s Reliance Power IPO, the largest in India’s history, was eagerly anticipated and even more swiftly bought, becoming fully subscribed within a minute of trading. However, what followed remains a well-examined debacle.
The company’s stock closed the day 17% down, when many heavily leveraged buyers sold their stakes after not attaining the value they had hoped for. In an effort to soothe nervous investors, Reliance offered a discount on shares, which only seemed to worsen the stock’s tailspin. Reliance intended to use most of the proceeds of the IPO to finance an Ultra Mega Power Project in Sasan, India.
In 1970, going public was not the first choice for most companies hoping to raise capital, and it was the last decade to see multiple months without a single IPO listing. At the time, Walmart had 38 stores and annual revenue of more than $ 44 million. Brothers and co-founders Sam and Bud Walton had gone into debt by expanding their business through bank loans, and felt that going public was the only viable way to reduce their debt while continuing to grow the business.
The initial offer of 300,000 shares was traded over the counter, but in less than two years, their value had quadrupled, and Walmart began trading on the New York Stock Exchange. Taking stock splits into account, 100 shares of Walmart purchased for $ 1,650 in 1970 would be worth more than $ 19 million today.
Impressive returns for Walmart, and other early technology investors from the 80s, arguably helped fuel the IPO boom of the 90s and continue to drive the appetite for IPOs today. For the Walton family, going public was a key step in becoming the world’s largest company by revenue.
CSE and SEC on going public
SEC Chairman Viraj Dayaratne PC, during the inaugural Issuer Forum 2021, hosted under the theme of “Founder to Family – Leveraging Going Public” shared his perspective on the matter, stating: “One of our objectives is to increase liquidity of the market. There are many misconceptions in the market. One is that the listing process is cumbersome, it takes time, and also it can be very expensive. But it is not as cumbersome or expensive as many would perceive. It is one of the best options to raise capital. That is why we want businesses to come to the capital market and make use of the opportunities.
“The Government has created a healthy environment. The last Budget proposal has given many tax incentives which are open until the end of the year. So it is the best time to come and list your company.”
Speaking during the same event, CSE Chairman Dumith Fernando noted: “It’s an interesting juncture in our equity markets and in our capital markets, with an environment that has become much more conducive to more companies accessing capital markets.
“We thought now is the right time to start speaking to companies, especially family-owned businesses, about the types of benefits, the types of processes, and the types of multigenerational value you could get from being listed on the stock exchange. With family businesses, one of the most important things that listing can do for you is strengthening your governance and creating a legacy where your company can withstand various issues that might come as a private company.”
Capital Alliance Ltd. Managing Director of Global Markets and Investment Banking Deshan Pushparajah added his insight on taking family businesses public, stating: “When you think of it as a family business, it is important to take a view from a strategic perspective, which is right for the family. In that perspective, the critical thing to think about is the longevity of the business.
“Only 3-4% of family businesses make it beyond the third generation. So when you approach a listing, what should be considered is what is right to ensure the continuation of the business. One of the biggest objections to listing is losing control. In essence, control is being able to direct the future of the company and that could be achieved in many different forms, such as having a private trust, multiple classes of shares, brand ownership, and other options.”
Lynear Wealth Managing Director Dr. Naveen Gunawardane shared his insight into creating a governance structure for family matters prior to an IPO and aspects of family wealth management. “When managing wealth, we see a lot of people make the mistake of taking a piecemeal approach. So the key thing to think about here is that you need to institutionalise a process in which you actually make your investments and manage your wealth.
“Ultimately, a business needs to place a governance structure in place, and with such a structure, your investment portfolio starts to diversify with time, which in parallel provides you with better risk management. Ninety per cent of family wealth is lost by the third generation, and an IPO is a fantastic way for you to ensure longevity of your family business,” he said.
Speaking about a few misconceptions associated with listing, including the perception of increased regulation, financial disclosures, and loss of control, as well as the perception of high costs, GAJMA & Co. Partner Jithendran Gajendran said: “Listing is viewed as expensive (with costs associated with) tax consultants, brokers, PR agencies, and auditors. But the truth is, it is not like that; when you go through the process, you realise that you save money – might be tax, cost optimisation, or for other reasons. Listing also helps you in transitioning from generation to generation by professionalising the business in a speed that will allow you to get the benefits.”