Public and Private Companies
In the business world we often see several types of companies dominate the market landscape. For the most part however, public and private companies are the most common types of companies. Ultimately, the difference between these two types boils down to the ownership structure, financing requirements and reporting requirements.
Every company starts off as a private company and if they choose to go public will always go through an IPO. A private company will still have shares and shareholders but these shares are NOT available to the public for sale. There seems to be this notion out there that public companies are always big and private companies are smaller. While that may be the case- some of the world’s most powerful companies are private such as Ikea, Mars Foods, Deloitte, PwC and Cargill come to mind.
The question always remains why do some companies stay private while some go public?
1. Better access to funds within the public market
Although private companies can seek out capital also a public company will have access to permanent capital through the numerous retail investors. The public market unlike the private one provides an abundance of cash for investments. A public company is also more likely to receive funding as it is more known and has accessible financial documents. Since public companies trade on a centralized exchange they are also constantly exposed to the eyes of investors and with technology today it makes it seamless to invest capital through any public venture listed on a domestic exchange. (you can invest in Intl markets but it is a bit trickier).
2. Less Expenses and Less Reporting Requirements for private companies
Like with everything in life, things cost money and going public can be a huge expense for companies. The IPO in itself is a long and costly process. First an investment bank/underwriter is usually hired that will orchestrate the sale and set the opening price for the stock. There is also a chance that the IPO is unsuccessful and investors do not want the stock in which case the stock may open at the lower end of a possible price range and tank. There is also more reporting requirements for public companies and they have to conform to rules from the Securities and Exchange Commission (SEC and OSC in Canada).
3. Less Shareholder Pressure = more flexibility to pursue different goals
The golden rule of shareholders is that management's sole responsibility is boosting the value of shares. Since executive managements is held responsible by the shareholders there is an intense pressure to develop increasing revenue and profits. This is the reason why growing companies NEVER go public during the product development phase as shareholders are very impatient and many opt for profits before anything else. There is also the possibility that management can get ousted if shareholders get too impatient which can result in the loss of years of work and product development.
On the off chance that public companies want to revert to their private status they can always do so through a process called privatization in which existing shareholders are bought out by a party and that party becomes the new owner.
Disclaimer: All of the above is my own personal opinion it should not be considered as investment advice. Please do your research and consult with a licensed representative before making any financial decision.
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