Getting underway in board formation.

• Author: Heller, Steven M.
• Position: Board of directors

For the smaller company, an initial public offering (IPO)promises immediate influx of capital, visibility, less dilution of ownership than through private offerings or venture capital financing, creation of stock as currency to leverage merging with or acquiring other operations, and improvement in credit position.

On the other hand, IPOs do not come cheap. They promise loss of privacy, distraction for key executives away from running the business, as well as all the expenses associated with going public (legal, accounting, consulting, and underwriting costs).

It is a tempting risk/reward arena, but many smaller companies move into the rigorous IPO process unprepared. A recent Big Six accounting firm survey revealed that two in 10 of the nation's fastest-growing small companies "very likely" to go public in the near future lacked both a business plan and necessary accounting systems and controls -- and almost a third had not established a board of directors who met at regular intervals.

Selecting a competent board -- diversified, compatible, and sufficiently accomplished to impress wary investors -- seems an obvious obligation. Yet, smaller companies, which may be family controlled or dominated by a single powerful personality, can find it an awkward process. As the quarterback on the IPO team, the investment banker, who has been privy to board selection process successes and shortcomings in many similar listing exercises, can provide important insights and advice.

Is The Timing Right?

Going public assumes your company has established a track record of reasonably predictable performance over time. Specifically, you should be able to cite: [] A history of sustained revenues and earnings, products or services in demand, or proprietary technologies with strong future growth promise. [] There or more years of audited financial reports, in-place financial systems and internal controls, and the ability to meet both the initial listing requirements of the stock exchange and external reports required on an ongoing basis. [] More qualitative factors, such as strong, stable management, reputation, commitment, coherent vision -- and management's ability to articulate these intangibles forcefully and consistently in rooms filled with challenging strangers during the IPO "road show" process. These traits of corporate character are created and nurtured first and foremost by a board of senior managers and credentialed outside leaders. The investment...