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.

As you take your company through this 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, there is the Discounted Cash Flow (DCF) analysis. This 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 investors 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 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.

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 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. 

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 equity investors to purchase their 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, because the more 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, one of which is the 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.  

Taking your publicly traded company private can give you the flexibility you need to tackle your challenges, and it's easier than ever to do so. If you want to take advantage of all the benefits going private can give your business, make sure to do your homework and understand what you'll be getting into if you do.