The Advantages of Staying Private: Benefits of Avoiding Public Listing
Many businesses, especially those founded by visionary entrepreneurs, are often faced with the decision of whether to remain a private company or go public by listing on a stock exchange. This article explores the advantages of staying private, focusing on control, financial benefits, and management flexibility.
Control and Profit Distribution
One of the primary advantages of remaining a private company is the retention of control. Companies that go public must disclose extensive information and comply with stringent regulations, which can limit the ability of the founders and early investors to maintain their vision and direction. In a private company, the founders and early investors retain control and profits, ensuring that the cash flows directly into their pockets rather than being shared with public investors or large corporations. This can be particularly advantageous for founders who have invested significant time, effort, and capital into building their business.
Financial Efficiency
Public companies incur substantial costs related to reporting and compliance. These costs can be quite high, with estimates ranging from $100,000 to significantly more per year, depending on the scale of the company. As a private company, you can avoid these expenses, which means more profits can be distributed to the owners. This can be particularly beneficial for smaller companies that may not have the resources to withstand the high costs associated with going public.
Management Flexibility and Long-Term Focus
Another significant advantage of remaining a private company is the freedom to focus on long-term goals without the constraints of quarterly earnings reports. Publicly traded companies are subject to immediate pressures from market forces and investor expectations, which can lead to short-term decision-making. In contrast, private companies can concentrate on long-term strategic planning and development, allowing them to build a stronger foundation for sustainable growth. This flexibility is especially valuable for companies that operate in industries with longer development cycles, such as technology or pharmaceuticals.
Case Study: A Business Deciding Against Going Public
The business we spent twenty years creating was always destined to attract a strategic buyer willing to pay a premium over its standalone market value. However, had we gone public after an Initial Public Offering (IPO), we would have faced additional regulatory hurdles, making it more difficult to sell to a strategic buyer. Additionally, we were able to raise "smart money" from private investors who brought more than just cash to the table, enhancing our growth potential without diluting the control of our shareholder base.
As a B2B business, we didn’t require the higher public relations profile that a listing would have provided. Around year 13, when our early angel investors were looking to exit, we chose a private equity firm that bought a significant minority stake from the selling shareholders while also bringing resources to help us maximize our strategic sale. This approach allowed us to maintain control while still achieving the desired outcome.
Key Benefits Summarized
1. **Control and Profit Distribution**: Retaining control and ensuring that profits go to the founders and early investors rather than public shareholders.
2. **Financial Efficiency**: Reducing costs related to reporting and compliance, allowing more profits to be distributed.
3. **Management Flexibility and Long-Term Focus**: Focusing on long-term goals without the constraints of quarterly earnings reports, enabling better strategic planning and development.
For entrepreneurs and business owners who value control, profitability, and flexibility, remaining a private company offers substantial advantages. Whether it is through strategic partnerships, private equity investments, or other means, choosing the private route can be a wise decision for those who wish to keep the growth and direction of their business aligned with their long-term vision.