As a business leader, one important decision is whether to go public or stay private. This applies to both solo entrepreneurs and those in a group. Going public means opening up to the public market while staying private means keeping autonomy. This decision is crucial for financial success.
Becoming a publicly traded company differs from staying privately held, with its opportunities and challenges. To help you understand the pros and cons of each option, we will take a closer look at both entities. This will provide insight into the factors that can assist you in making this crucial decision.
An Overview of Private vs. Public Companies
At the primary level, the main difference between private and public companies is their ownership structure. Private companies are closely held, and public companies have shares traded on public stock exchanges. To begin our exploration, let’s look at the pros and cons of private companies.What Are the Pros of a Private Company?
- Autonomy and Control: One of the most significant benefits of a private company is the self-governing aspect it affords its owners. A select few concentrate decision-making authority in their hands. This advantage allows for quick and nimble market changes without requiring lengthy and extensive board approvals.
- Privacy: As the name suggests, private companies enjoy more privacy than their public counterparts. Financial disclosure and operational transparency requirements are significantly lower, thus providing a protective barrier around sensitive business information.
- Long-Term Focus: Freed from the constraints of quarterly reporting pressures, private companies can plan far ahead. They can develop and execute strategies focusing on long-term growth and sustainability.
- Flexible Strategies: Without the never-ending scrutiny of shareholders and market analysts, private companies enjoy greater flexibility in their strategic planning. This adaptability can be a powerful tool, especially in industries where rapid change in the marketplace is the norm.
What Are the Cons of a Private Company?
- Limited Access to Capital: On the flip side of autonomy is the challenge of limited access to capital. Private companies often face obstacles when attempting to raise funds at the scale of those available to public entities. While alternative sources like private equity and venture capital financing exist, they typically do not match the capital infusion achievable through an initial public offering (IPO).
- Lack of Investor Liquidity: Private company shares are typically illiquid, unlike companies with public shares that can be bought and sold on the stock market. This means these shares cannot be easily converted into cash. This lack of a reliable exit strategy for investors can impact their investment attractiveness.
- Talent Acquisition Challenges: The job market has entered a unique era, with many public and private companies having to find unique strategies to lure top-tier talent to their ranks. Public companies often offer stock options, a form of compensation that private companies may struggle to match.
Next, let’s turn our attention to the other side of the spectrum—public companies. With public companies, ownership is dispersed among a diverse range of the public sector. These shares are actively traded on stock exchanges.
What Are the Pros of a Public Company (IPO)?
- Greater Access to Capital: Going public can be like discovering a pot of gold at the end of a rainbow. By making stock available to purchase publicly, companies can raise substantial funding to fuel expansion, innovation and acquisitions. This unparalleled capital access provides a compelling reason for many companies to choose the public option.
- Investor Liquidity: The ability to buy and sell shares of stock offers an attractive exit strategy. This exit strategy boasts well with early investors and employees with stock options, contributing to a more diverse investor base.
- Brand Visibility: When a company goes public, press releases and other media attention typically occur. This and being listed on stock exchanges can significantly elevate a company’s visibility. This higher level of exposure can help attract customers, partnerships and potential merger or acquisition targets.
- Mergers and Acquisitions: Publicly traded shares can be a valuable currency for mergers and acquisitions. This strategic advantage allows companies to use their stock to acquire complementary and adjacent businesses without a direct outpouring of cash.
What Are the Cons of a Public Company?
- Increased Regulations, Compliance and Scrutiny: The journey to becoming a publicly traded company can be rewarding, but you will encounter many regulatory hurdles. The administrative burden and associated costs can be extensive, from financial reporting requirements to Securities and Exchange Commission (SEC) regulations.
- Loss of Autonomy: Public companies will face a loss of control. Decisions become subject to assessment and approval by boards and shareholders. Founders and current leadership may encounter resistance to their original company vision. This could lead to losing control over the company’s future direction.
- Short-Term Focus: The requirements for quarterly reports and the need to meet financial expectations can turn a public company’s focus toward the short-term. These pressures may lead to decisions prioritizing immediate financial gains and remediation over longer-term strategies.
- Market Volatility: Publicly traded stocks are always at the mercy of market fluctuations and investor sentiment. These factors, often beyond a company’s control, can influence stock value and expose it to short-term market trends and downturns.
- Risk: Taking your company from private to public always poses a significant risk, especially for small companies. It's vital to ensure your company can sustain market drops, economy shifts and investor fluctuations.
Critical Considerations for Making the Decision to Go Public or Stay Private
Now that we have examined the pros and cons of public and private companies, here are some final factors to consider as you weigh your options.
Business Goals and Strategy
If rapid expansion and access to substantial capital are your business’s goals, going public might be a compelling option. However, if maintaining control without external pressures and focusing on long-term sustainability are the focus, remaining private may be a better choice.
Staying private could even be seen as a modern trend, with McKinsey & Company reporting the number of publicly listed companies dropping from 5,500 in 2000 to 4,000 in 2020.
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Financial Health and Capital Requirements
Assessing your company's current financial landscape is vital. Public companies can leverage the stock market to raise capital. Private companies may need to explore alternative funding sources from trusted private business lenders who offer private business loans.
Market Conditions and Timing
Any business leader knows that timing is crucial in any strategic decision. Understanding market conditions, both locally and globally, and gauging the interests of investors can influence the decision-making process.
Risk tolerance plays a pivotal role in that decision. Going public leads to a new world of risk due to market volatility. Private companies—who still experience risk—face a smaller sphere of outside influence.
Legal and Regulatory Preparedness
The legal and regulatory preparations required for going public are an intricate process. Ensure you can engage legal counsel who is well-versed in SEC law and compliance nuances to navigate the process. Additionally, transparency and effective communication with your investors are not only crucial to maintaining investor trust—they become a legal obligation.
Company Values and Vision
While your vision as a leader should guide the overall decision, do not discount your employees and their sentiments. Going public might introduce stock options and other incentives, while staying private may provide a closer-knit work environment that some employees prefer. Consider the beliefs in your company's culture when determining the desired qualities of your future team.
Navigating the Future
The decision to remain a privately held company or embark on the journey to become publicly traded is crucial for any business. Both paths offer a unique set of advantages and challenges, and the ultimate decision is anything but one-size-fits-all.
Seacoast Bank can provide support if you're unsure about going public or staying private for your company. We offer business insights and financing to help you make the best decision for your growth and resources for growing your publicly traded business.
If you aren't ready to go public but need extra business capital, we also offer small business or commercial loans to further your business's growth. For additional banking or financing questions, speak with our dedicated commercial banking team.
Topics:Grow Your Business
At the primary level, the main difference between private and public companies is their ownership structure. Private companies are closely held, and public companies have shares traded on public stock exchanges. To begin our exploration, let’s look at the pros and cons of private companies.
If rapid expansion and access to substantial capital are your business’s goals, going public might be a compelling option. However, if maintaining control without external pressures and focusing on long-term sustainability are the focus, remaining private may be a better choice.