One of the most enjoyable parts of being in the training and development world is the opportunity to stay in touch with the past participants of our many Business Acumen, Business Leadership, and
Strategic Business Selling programs.
I recently had an email from a past participant who asked the following questions:
I hope you are doing well. I have a few questions about a company’s business strategy of staying private instead of going public.
Based on your experience is this due to the CEO/founder keeping control of his/her business? Is it looking for the right opportunity? What would be the benefits of being private instead of public?
Thank you!
My Response
Hi, and thanks so much for reaching out! All is good here…nice and busy and working on great projects.
The answer to your great questions is complicated. The first thing one has to consider is the size of the company in terms of revenues, profit, and people.
Most people categorize the type of company by:
- Small – Up to $50 million in revenue
- Medium - $50 million to $500 million
- Large - $500 million to $2 billion
- Mega - $2 billion and up
Typically, it is the small and medium-sized companies that would likely go public, but there are a wide variety of factors to consider.
Valuation
One of the most important factors of consideration is valuation, meaning how much is the business worth? While there is not one way to determine the exact value of a business there are several standard methods including Assets less debt, multiple of revenue, multiple of profit, and multiple of free cash flow. Ultimately, value is equal to what someone is willing to pay for the company or the stock.
Why Go Public?
The primary reason any company would go public is to raise capital for growth. This means you have a strong business that is growing, but to accelerate and scale growth you need more capital (cash) to do that. So, you decide to trade equity (ownership) of the company to investors who give you cash at what is called Market Valuation and you use that cash to invest in R&D, Sales, Manufacturing, and whatever else you need to grow faster.
It is a very similar decision in the business simulations we ran where the company had a choice to issue more stock in exchange for capital to grow.
When this system works, it can be a true win-win for everyone. The company grows and makes more profit, and the investors get a return in terms of appreciation of the value of the stock plus any dividends. The CEO and executives in theory are well compensated for performance and their remaining stock increases at a greater rate than it would if they didn’t take on the capital.
Why it Doesn’t Work
The moment a founder takes on capital in exchange for equity they are giving up some if not all control. Control is very important for a CEO because it includes strategy, execution, budgeting, and everything else. If there is a disagreement between the owners and the investors, it can make life miserable.
Companies will stay private for several reasons including:
- The owners keep all control
- They can make more money (they also don’t have to report how much money they make. In a public organization all salaries and bonuses are known by everyone)
- They can always sell the business whenever they want
- They can bring their families into the business
- They can collect cash and make acquisitions that they think are good without approval
In summary, the decision to go public or not is extremely complex. When it works, it’s great and when it doesn’t work, it can be catastrophically bad.
