It actually does take money
to make money, as many thriving businesses have learned. When companies reach a
certain size, they need outside capital to fuel growth. That’s as true for
independent publishers as for the Mom and Pop coffee bar that wants to compete
against Starbucks.

Unfortunately, venture capitalists
want quick and large returns. Initial public offerings (IPOs) are out for most
independent publishers because of the cost and scale. That leaves the usual
suspects (family and friends); taking on debt; or—for the adventurous,
perhaps—selling stock through a private placement only to accredited,
stock-savvy investors whose individual net worth exceeds $1 million.

After several years of relying on
private placements to raise the cash it needed to grow, managers at
Berrett-Koehler Group, Inc., a business publisher based in San Francisco, came
up with a different idea: a direct public offering (DPO) to raise capital to
expand the company’s operations so it can increase revenues from $6.6 million
(the 2004 figure) to more than $10 million by 2008. In addition to expansion,
B-K’s goals included increasing its pool of working capital and reducing its
debt. Looking for an innovative way to raise funds, such as a DPO, was in
keeping with the publisher’s mission of publishing books that support “the
movement toward a more enlightened world of work.”

Considerations

With a DPO, a company sells shares
directly to affinity groups, such as customers, suppliers, and distributors. By
contrast, during an IPO, shares are sold by security brokers to their
customers.

DPOs usually raise more money than
private placements, and they cost less than IPOs. According to Drew Field,
author of Direct
Public Offerings: The Definitive Guide—The New Method for Taking Your
Company Public (Sourcebooks), DPOs can be cost-effective for
offerings as small as $500,000.

And there are other advantages.
With a DPO, the company largely controls the pool of potential shareholders,
and those shareholders are generally boosters of the company. For example, in
B-K’s offering, its authors bought many shares. Also, a DPO is ideal for
publishers who want more than capital. “It’s both a way to raise money and a
marketing device,” says Steve Piersanti, president and publisher of B-K. “It
means that you are creating closer connections.”

Those are the positives. One
negative is the workload a DPO demands. Yes, the offering company has a lot
more control in a DPO than it would in an IPO, but that plus is also a minus.
“It’s all under your control, but it’s a lot of work, and it’s all work that <span
class=95StoneSerifIt>you must do,”
Piersanti says. For example, a company must file in each state where it plans
to offer stock for sale, and the rules for its stock offering can vary state by
state. Also, the company must market the DPO. Finally, it must hire an attorney
familiar with the DPO process because that process is so complicated.

While a DPO involves working hard
for your money, it can be lucrative, as B-K’s experiences show. The company
began offering stock in December 2004. As of April 30, 2005, B-K had sold about
26,500 shares and raised about $212,300. Originally, shares were sold for $8,
but the price went up to $9, effective July 30, 2005. B-K required participants
to buy a minimum of 100 shares, for a total offering of up to $1 million worth
of shares.

B-K’s DPO was successful partly
because Piersanti did his homework to make sure this was the right move for his
company. Publishing books about business helped raise awareness of
alternatives. And Piersanti learned as much as he could about DPOs. “I read
articles about direct public offerings and companies that had done them,” he
recalls. “I read a book on it. I spoke to several other companies that had done
direct public offerings.” For example, Piersanti talked to people at
Chinaberry, an international catalog company that sells family-centered books
and items. He also read up on DPOs at Drew Field’s Web site (<span
class=95StoneSerifIt>www.dfdpo.com)
and took its “screening test.”

Qualifications

Several requirements must be met
for a DPO to be appropriate. Among other things, you should have:

An
affinity group or groups as potential buyers.<span
style=’font-size:11.0pt’> Affinity groups can include your friends, customers,
suppliers, and distributors, or anybody else with an interest in helping you
succeed. “You have to have a lot of customers or other stakeholders who think
what you do is important and good,” Piersanti says. “They support you and
believe in what you are doing.”

Enough
potential customers for the offering.
In Piersanti’s words, “You have to have a large enough number of people to make
it worthwhile. You have to consider that it’s going to cost you about $100,000
in legal fees, marketing costs, and printing the circulars, and that’s if you
manage your money well. If you don’t, it could cost up to $150,000.”

A way
to reach your affinity groups.
B-K, like most other publishers, has a database of customers—a convenient
way to reach would-be shareholders and tell them about the offering. In addition,
the company publicized its DPO on its site.

Audited
financials dating back several years.
This information is required in your DPO offering circular.

A
profitable company. A DPO “can’t
be a desperation move,” Piersanti says. “You have to be profitable, and the DPO
has to be part of a larger strategy.”

A
business that can be understood by people with a limited amount of business
experience. That’s because you’re
marketing shares directly to the public. If your company has a
hard-to-understand product, it will probably be too difficult to persuade
people to buy your stock.

Implementation

Once B-K’s management decided to
go ahead with the DPO, it had to decide where to make the offering. First, the
publisher determined which states most of its customers lived in and what the
filing requirements were in those states.

B-K’s first list of states with
enough customers to make a DPO worthwhile included more than 20. After
reviewing the legal requirements and nixing states where it would be too costly
or burdensome to conduct the offering, the company whittled it down to nine and
began with seven—California, Illinois, Indiana, Minnesota, New Mexico,
New York, and Wisconsin—plus the District of Columbia. In June 2005, the
offering was expanded to Missouri and Ohio. In November 2005, it closed
everywhere except in California, where it was renewed for several more months.

So far, Piersanti reports, the DPO
has met his expectations, both in terms of time and money invested and in terms
of money raised. That said, Piersanti admits, “It’s never as simple as you’d
like.”

In other words, a DPO is a viable
and useful financial instrument for publishers, but the publishers get only as
much out of it as they put in. DPOs are not for the faint of heart or those
unwilling to make large investments of time and resources.

Jenny McCune, a business
writer, has worked in book publishing and reports regularly on publishing and
publishers for PMA
Independent. You can reach her at jennymccune@imt.net.