Reasons to Keep Your Company Private
Many IPOs go well. Google is a good example. Some companies prove their worth even after a botched IPO. Facebook comes to mind here. There are good reasons for a company to go public. Cash is the obvious one. Typical IPOs raise between $100 million and $150 million, with that number quite possibly surpassing the billion-dollar mark as well.
Going public is also seen as a major achievement, since a publicly-traded company must adhere to strict federal regulations. This is key if that company wants to gain larger customers.
Going public also allows a company to reward its supporters (by selling shares in the company over time). In some instances, stock options are worth more than an employee’s salary (there are several Facebook employees on staff who are millionaires thanks to their stock options).
Why then – with so many benefits to going public – are a growing number of companies opting to stay private, either for longer or, potentially, for the long haul?
Staying private means, well, staying private
While going public means the potential for enormous cash generation, it also comes with an increased scrutiny by regulators and shareholders. A publicly traded company has to give up some control in order to gain access to large amounts of capital it might not have had access to as a private company.
But companies that choose to stay private often do so in order to avoid the drawbacks of certain requirements (issued by the SEC) and expectations, such as annual/quarterly reporting, investor calls, and third-party auditing.
A publicly traded company is required to produce these elaborate annual reports with tons of information on the company’s finances. A private company does not have to produce that type of report, although it still has to ensure its accounting is in order.
The raising capital issue
Clearly one of the most attractive aspects of becoming a publicly traded company is being able to raise capital in the public markets. While private companies can’t raise capital in the public markets, they do have access to it through other sources.
Bank financing is one such source. Private companies are able to establish relationships with their banks and gain access to commercial lines of credit as needed. Private companies can also use assets or inventories as collateral for a loan.
Private companies can also raise capital through the offering of stock ownership to outside parties or employees. The value of these private stocks are determined by private valuation and investors who own this stock are forced to accept the valuations as they’re determined by the company’s valuation.
Why delay going public? Because the time may not be right
Many companies simply don’t have a choice but to delay their public offering, based on market trends and dictations. Public investors prefer larger tech companies. Those who choose to go public too soon – as a smaller market-cap IPO, typically perform poorly on Day 1, and continue that trend for the life of the IPO.
In short, public investors are making it clear that they’re selective about the IPOs they buy, and the prices they’re willing to pay. Startups benefit from waiting until they become a larger, more mature company, before they go public.
But even if going public is a company’s long-term goal (as it usually is), that doesn’t mean the company’s owners have to squander in the interim until they’re deemed “ready.”
Companies don’t have to go public in order to raise capital
As mentioned earlier, there are plenty of compelling reasons why companies opt to go public. Gaining access to large amounts of capital certain ranks high among those reasons. Yet the drawbacks associated with this increased capital – such as increased scrutiny by the SEC and shareholders – sometimes outweigh the benefits.
It’s good to know that private companies can maintain their freedom, while turning toward alternative sources of capital. Both traditional lending institutions and stock are effective ways to raise much needed capital. It’s also important to note that going public isn’t always the right decision.
Some companies (UPS, for example) opt to go public after decades as a private company, and are satisfied with the results. Others, like S.C. Johnson, continue to hold onto their private label and are just as happy with their decision.
In the end, knowing there are options on both ends of the spectrum should help business owners realize that there is no one, true solution to raising capital. Each situation requires its own, unique solution.
RC Victorino contributed to this article.
- Covid-19 Impact on US Private Capital Raising Activity in 2020 - May 27, 2021
- Healthcare 2021: Trends, M&A & Valuations - May 19, 2021
- 2021 Outlook on Media & Telecom M&A Transactions - May 12, 2021
