Staying Private

What Is Staying Private?

Staying private describes a company's choice to continue being privately held, which excludes it from trading on a public stock exchange or making its shares available to the public through an IPO (Initial Public Offer). Ownership is retained by shareholders, who are often the company's founders, individual investors, or employees. 

Public ownership offers cash flow but exposes companies to scrutiny from shareholders and regulators, potentially causing a loss of control. Private businesses often avoid obligations like financial statements, investor conferences, and audits. However, while remaining private necessitates maintaining good accounting practices, private companies do not have to issue comprehensive yearly reports like publicly traded companies.

• Staying private is a decision made by companies to avoid going public. 
• It allows a business to maintain control, privacy, and flexibility by avoiding the legal constraints and reporting requirements of being a publicly traded company.
• Remaining private can have several benefits, including easier corporate governance, more control over the company's strategic direction, and a lower liquidity discount than publicly traded peers. Additionally, there is less public and competitor pressure and fewer costs because of the lack of reporting obligations.

Staying Private Explained

Staying private is the choice made by a business to remain privately owned without seeking an initial public offering (IPO). This entails not listing itself on a public stock market or making its shares available to the general public through an IPO. Remaining a private company is important because it allows the business to maintain control, privacy, and flexibility. Control over publishing financial information and long-term strategic decision-making is made possible by avoiding the legal constraints and quarterly reporting requirements that come with being a publicly traded firm.

Underwriting fees, legal fees, and underwriter's discounts are just a few of the up-front expenses that may quickly mount up during an IPO. Furthermore, becoming a public company comes with additional business costs, such as compliance, additional staff, resources, and quarterly reports.

Remaining private can limit expansion as it may hinder small businesses from accessing large financing from external sources. Companies can reduce spending or raise cash flow through equity or debt to manage negative cash flows. Equity can help businesses expand quickly by bringing expertise, networks, and experience.

Furthermore, a small business may suffer if money is raised just to raise money since it suggests that management has no idea what to do with the money, and it might be wasted. Decisions to remain private or go public are crucial for companies. Therefore, management shall consider risks and costs when making these decisions.

Examples

Let us look into a few examples to understand the concept better:

Example #1

Let’s take an imaginary example of XYZ Company- a software company that faced a decision to go public or remain private. By raising significant money through an IPO, going public would allow the company access to a larger investor base, which might support its expansion goals and boost its reputation and visibility. However, XYZ opted to stay private and pursue private investment to preserve control over its business operations and decision-making procedures. As a result, XYZ was able to choose its investors more carefully and match their beliefs and long-term objectives.

Furthermore, not going public would spare XYZ from the regulatory weight and compliance expenses of being a public business, freeing it up to concentrate on growth plans rather than administrative duties. By opting to remain private and look for private financing, XYZ might sustain control, confidentiality, and flexibility in pursuit of its long-term growth objectives.

Example #2

Fabindia, an Indian apparel retailer, has withdrawn its ₹4,000 crore initial public offering (IPO) due to unfavorable market conditions. It joins a growing list of companies postponing listing plans amidst concerns over rising interest rates impacting stock markets. The decision to withdraw the IPO was attributed to the current rough market conditions, as stated by Fabindia. Additionally, the decision will maintain Fabindia's "staying private" status and allow it to explore other liquidity options.

Benefits

Some of the benefits of staying private are:

• Public disclosure

Private companies need not disclose their records to the public. This can prevent the public from knowing the company's financial health when competitors publicly disclose the same information. Hence, corrective actions can be taken without public outcry.

• Aids in long-term planning

Companies can reduce focus on short-term performance and be more supportive of long-term planning. Publicly traded companies face intense scrutiny on quarterly performance, which can lead to short-term decision-making. Not going public allows for a long-term strategic approach to creating shareholder value.

• Lower corporate governance

Private companies have fewer shareholders and smaller boards, resulting in simpler corporate governance and capital structures. This enables quicker and more decisive management actions.

• Increased Control

These businesses can concentrate on long-term growth strategies because they are not required to generate immediate profits per share.

• Illiquidity premium

In the past, private companies traded at a discounted valuation due to limited liquidity. However, the increasing liquidity in private markets, with a more actively traded secondary market, has reduced the relative liquidity discount compared to public peers, making private status more appealing for longer periods.

• Decreased Pressure

Private companies are not required to give competitors or the general public access to confidential operational information. As a result, businesses are free from concerns about buyouts, hostile takeovers, and shareholder expectations.

• Lower costs

Since private businesses are exempt from reporting requirements, their costs are lower.

Staying Private vs Going Public

Some of the differences between both the concepts are given as follows:

Points	Staying private	Going public
Concept	Staying private refers to a company remaining privately held.	Going public, on the other hand, involves offering shares to the public and becoming a publicly traded company.
Ownership and Control	Remaining a private company allows founders and a select group of shareholders to maintain ownership and control.	Going public results in ownership dilution and increased influence from public shareholders.
Regulatory Requirements	Private companies have more flexibility and face fewer regulatory burdens.	Public companies are subject to periodic regulatory obligations such as financial reporting and disclosure requirements.
Access to Capital	Continuing to be a private company relies on a comparatively smaller pool of private investors, venture capitalists, or debt financing.	Going public allows companies to access wider investor options and raise required capital through public markets.
Public view	Private businesses can escape the changing pressures of the public market with regard to this and enjoy greater privacy.	Public corporations are subject to increased market pressure, which includes demands from analysts and shareholders and the requirement to disclose material information, including financial data.
costs	A company remaining private comes with its pros and cons. for example, no or less legal and maintenance fees than a public company.	Public companies require periodic reports, audits, and recruitment of associated persons for the same. This whole process becomes a costly affair when compared to the other.

Frequently Asked Questions (FAQs)

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