As companies and management look to re-organize and restructure, raise new capital and build long term value without the scrutiny of public market pressures and stress of public reporting cycles, they often will look to go private. Some companies may have been public for decades, while others have only been in the public markets for a short time. Discover the advantages of being a private company , signs it might be a good idea, and the path to going private when you're a publicly owned company.
What Does It Mean to Take a Company Private?
Going private means your company whose shares are publicly listed are acquired and de-listed from a public stock exchange. Your company’s shares will become privately owned by an individual or group of individuals or a private equity firm.
Going private can change a number of key elements, such as:
- Business operations: Private businesses are bound by different rules and regulations than public ones.
- Leadership structure: Business decisions are made to satisfy owners, rather than designed to please shareholders and raise share price.
- Government oversight: There's less government oversight of private companies than public ones. For example, there are fewer requirements when it comes to Securities and Exchange Commission (SEC) reporting, but overall private companies remain subject to corporate law and lender covenants.
Why Companies Choose to Go Private
Taking a public company private can happen for an array of reasons.
Some grow tired of the high costs of regulations with which public companies must comply.
Typically, public companies must maximize stock performance to keep shareholders happy, and the juggling efforts this requires can take its toll.
In other cases, companies decide it's in their operational interests to go private. Perhaps they want to shield financial data from the general public or reduce their risk of litigation, to name two compelling motivators.
Other reasons many companies choose to go private include:
- Undervaluation in public markets
- Volatility in share prices
- Pressure from activist investors
- Long-term transformational plans
- Operational restructuring needs
- Increased availability of private capital
- Market timing considerations
Methods for Taking a Company Private
Companies that are interested going private have a variety of methods available to them. These include:
- Leveraged buyout (LBO)
- Management buyout (MBO)
- Tender offer followed by merger
- Reverse stock split (in limited cases)
- Private equity sponsors
- Debt financing structures
- Premium pricing strategy
How to Take Company Private
Taking a company private can be a complex and costly process.Many companies work with a private equity firm that can provide the capital to buy back all publicly traded stock. Here's a walkthrough of how a private equity buyout usually works:
- A company approaches private equity investors about a buyout, or,vice versa,the private equity firm approaches the company, who is often trading at a discount.
- Those investors will most often use both equity and multiple debt instruments to acquire the company. For instance, a leveraged buyout relies on borrowed funds to purchase the shares.
- The private equity firm issues a tender offer to buy all outstanding stock shares at a premium to the company’s current market price.
- Shareholders vote on the issue.
- Assuming the vote goes though, the shares are sold to the private equity investors, who now will own the company.
- Private investors will now look to provide operational excellence, pay down the debt used to finance the company’s purchase, increase the business’s working capital, support, or hire new management, all while looking to boost profits.
As you take your company through theprivate equity investments process, it's also important to plan ahead and start thinking about how you may return to being a publicly traded company if that's something you'll might need to do in the future. There are a number of exit strategies available to privately held companies looking for an infusion of capital from outside investors. These include a traditional IPO, the de-SPAC process and a direct listing.
Private Company Valuations
Making the transition from a publicly traded company to a privately held company also means a change in the way the company's value is determined. Assessing the value of a public company is much easier because there is a clear-cut metric in the form of the share price. However, in the case of private companies,other factors must be considered. Some of the most obvious ways to determine value include a company's financial performance or any extenuating risk factors investors may be aware of, but these are not the only ones.
In most circumstances, private equity investors will conduct thorough standardized analysis that gives them a clearer view of how much the business is worth. For example, a Discounted Cash Flow (DCF) analysis involves projecting the company's future cash flows over a specific period of time, determining the associated risk in the form of the weighted average cost of capital, and using the latter to discount the former. This provides a view of the present value of all projected cash flows, which are added together to determine the company's intrinsic value.
Another common technique used to determine the value of a soon-to-be privately held company is a Comparable Company Analysis (CCA). This compares the company being valuated to similar companies to create an estimate of the target company's value. Methods such as CCA and DCF analysis provide potential buyers with information they can use to make the most informed decisions.
Advantages & Disadvantages of Taking a Company Private
The surge in companies leaving public markets in recent years suggests that there are advantages to the move. Pros to going private again include:
- Greater privacy: Private companies aren't subject to the same reporting and oversight as public companies. Thus, the business is able to operate outside the public eye.
- Private decision making: As discussed, public companies must keep their shareholders' interests top of mind. Private companies can make decisions that reflect the owners' preferences rather than shareholders.
- Fewer regulatory requirements: Public companies have many regulatory requirements, including the need to file financial reports with the SEC. Private companies can be subject to reporting requirements, but they're typically less onerous. For example, private companies no longer need to comply with the Sarbanes-Oxley Act, also known as SOX.
Although there are advantages, there also are disadvantages to de-listing a company. Downsides of going private include:
- Alternate sources of capital: Being traded on the markets provide companies with a theoretically easy way to raise funds and support business growth. A private company will have to approach lenders, self-finance or explore other alternatives.
- Less protection: While there are workarounds, business owners generally have less protection and greater responsibility in a private business than a public one.
- Aggressive shareholders: If venture capitalists or private equity firms have an ownership stake in business, they can be quite aggressive in voicing opinions. If the visions for the business are different, it can create leadership challenges for business owners.
Just as going public can be good for the health of the business, so, too, can a public company switching to private ownership. By understanding business structures, the steps of de-listing a company, and the pros and cons, business owners can make the appropriate decision.
Regulatory and Compliance Considerations
It should go without saying that going from a public company to a private one involves a lot of paperwork. Making the switch involves several filings with the SEC to ensure the process has been thoroughly documented and meets all regulatory requirements. These include the filing of Schedule 13E-3 as well as proxy statements, disclosures of conflicts of interest, and others. Form 15 also is required to ensure the company is de-listed from public trading.
Impact on Shareholders and Market Trends
One potential obstacle to taking a company private is how de-listing impacts any existing shareholders. First and foremost, they must approve any offer from private investment firms to purchase their private shares and buy out the company. In general, private equity firms offer a higher price per share to incentivize shareholders into agreeing to the buyout. This may be complicated by any activist shareholders who would prefer to hold onto their stakes in the company to continue influencing its direction. This is why managing investor relations and shareholder communication is critical for ensuring a smooth transition, as the more shareholders that can be brought onboard with the plan to go private the smoother the process will be.
There are many reasons why companies choose to go private, including increased availability of private equity funds compared to years past. Over the last few decades, the amount of capital available from private sources has increased significantly, making it easier for companies to find funding without going public.
Going private can provide public companies with greater flexibility, but the transition requires careful planning and a clear understanding of the regulatory, financial and operational considerations involved. With the right preparation, companies can approach the process with greater confidence while maintaining control over critical information and workflows. DFIN can help organizations navigate complex transactions with the technology, expertise and support needed at every stage.