Thought Leadership  •  October 26, 2022

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Taking a Company Private: Benefits, Methods & Strategies

As companies and management look to re-organize and restructure, raise new capital and build long term value without the scrutiny of the public eye and pressure 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 a short time. Discover the advantages of being a private company instead of a public company, signs it might be a good idea, and the path to going private when you're a publicly owned company.

What Is Going Private?

Going private means your company whose shares are publicly listed are acquired and de-listed from a stock exchange. 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.

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 have to 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.

How to Take Your Business Private

Taking a company private can be a complex process. It can also be expensive. 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 privatizing usually works:

  1. A company approaches private equity investors about a buyout vice versa the private equity firm approaches the company who is often trading at a discount.
  2. Those investors will most often use both equity and multiple debt instruments to acquire the company.
  3. The private equity firm issues a tender offer to buy all outstanding stock shares at a premium to the company’s current market price.
  4. Shareholders vote on the issue.
  5. Assuming the vote goes though, the shares are sold to the private equity investors, who now will own the company.
  6. Private equity 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.

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 a lot of 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.

Just as there are advantages, there 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 going private. By understanding business structures, the steps of de-listing a company, and the pros and cons, business owners can make the appropriate decision.