Public vs Private Companies
Author: Mihaela Sopu
Date of Publication: 18/03/2023
Do you know the difference between publicly traded versus privately held companies? If not, keep reading this article to find out.
Going public means selling of a company’s stock to outside investors in an initial public offering (IPO), and then letting the stock trade in public markets. In fact, it is the first time that the general public has the ability to buy shares.
In particular, the process of a company going public involves some important steps having the main goal to protect the company and its potential investors. This operation is always assisted by an experienced team that the company chooses itself after interviewing a number of different investment banks, also called underwriters. This is the process of selecting an investment bank. The investment bank will help the firm to determine the offering price or price range, and determine the number of shares to be sold. It has also the role to convince potential investors to purchase the stock at the offering price. In essence, the investment bank is the entity that handles and manages the entire IPO process including the registration statement, the prospectus, and the stock pricing.
Advantages and disadvantages of public companies
Now that we saw what going public means and what the process is composed of, let’s see what the main advantages of a company going public are:
Facilitates rising new corporate cash.
Establishes a value for the firm.
Facilitates merger negotiations.
Increases potential markets.
The process of a company going public also presents some disadvantages that companies should consider before making the decision to sell its shares to the general public. Some of the disadvantages are:
Increases reporting costs.
Reduces owner/manager control.
Increases time spent on investor relations.
Now that we clarified what the process of a company going public is and how it works, as well as what are its main advantages and disadvantages, let’s focus on the opposite perspective, which is the process of a company going from public to private.
In a going private transactions, the entire equity of a publicly held firm is purchased by a small group of investors. The firm’s current senior management is usually maintained, or their ownership interests are increased. When a company goes private, its shareholders are unable to trade their shares in the open market as they did before. However, only accredited, and institutional investors can buy shares of stock in a private firm.
Advantages and disadvantages of private companies
Let’s have a look at what the main advantages of the process of going private can offer to a company:
Administrative cost savings.
Increased managerial flexibility.
Increased shareholders oversight and participation.
Increased focus on improving the business’s competitive positioning in the marketspace.
All these advantages do not come without some inconveniences. Let’s see what the two main disadvantages of going private are:
Difficulty to raise new capital. In fact, firms that have recently gone private are normally leveraged to the hilt, so it is difficult to raise new capital.
Increased risk of bankruptcy meaning that a difficult period that normally could be weathered might bankrupt the company.
To sum up, if the general public can buy shares of stock, then it is a public company. Otherwise, it is a private company that instead of selling shares of stock to the public, keeps its ownership to a small group of funders, institutions, etc. What type of company are you finally interested in?