By Jim Schleckser, Inc.
I have operated both public and private companies over the course of my career. But my strong preference has always been to run privately-held firms, for a bunch of reasons. I've often advised my clients in a similar fashion--especially because I found that spent more time dealing with the issues that came with being public rather than actually working on growing my business.
It turns out that my preferences also coincide with a trend that dates back a while now. There's been a steady rotation away from companies going public and remaining in privately-held hands, like private equity or venture capital firms, instead. While public companies still account for the same percentage of GDP that they did in the 1990s, the actual number of stocks you can find on a public exchange has dropped in half, according to the Columbia University Millstein Center for Global Markets and Corporate ownership. That means a lot fewer, but larger firms remain public. It's worth wondering how many would prefer to be private, if that option was available.
Over that same period of time, VC and PE funds have exploded to that point where they might have several billion-dollar companies in their portfolio and are flush with investable cash. We used to call these companies "unicorns" because of how rare they were in private ownership. That's no longer the case as more and more companies choose to remain private even as they rapidly scale.
There are actually several reasons behind this shift.
Cost
To be blunt, it's expensive to be public. There's a long list of expenses that public companies have to shoulder that private companies can avoid. While every company might bring in auditors, public companies are forced to use the large reputable multinational firms that charge an arm and a leg. There are also the internal controls you have to put into place to ensure you pass an audit. Then there are the costs associated with communicating with investors and analysts: trips to NYC and London, printing and filing quarterly and annual reports, hiring an external investor relations firm. The list goes on. For smaller firms, those costs can even be onerous. I remember one client I worked with who ran a public company with about $80 million in revenue. He estimated that his costs of being public were about $3 million a year. For a company that was making at best $9 million in profit, that was a tough nut to swallow.
It used to be true that public ownership was desirable because, to quote an old Wall Street adage, "no one pays like the public". That isn't always true anymore as private firms struggle to find homes for their buckets of cash. This excess supply drives up demand for quality forms and hence, prices to the point they can be competitive with public ownership.
Quarterly Behavior
When you run a public company, you have to run the company quarter to quarter. You're always accountable to your projections and those of the analyst community. Every time you announce numbers, they will be studied and analyzed to the nth degree. And don't even consider trying to reduce earnings in a quarter in order to make a long-term investment. You can't do that when you're public. Any variation from those projections, even by a penny a share, will result in potentially significant swings in the stock--up or down. This is the reason many public firms reuse to give guidance on future results, or share a large range of possible results.
A variation in the price of the stock can put pressure on the CEO, either by activist shareholders or by the board, both who could look to replace them. That's why it's always a good bet to make a purchase from a public company at the end of the quarter: they're always willing to strike deals and offer discounts as a way to ensure they hit their quarterly numbers.
Regulations
Every public company has strict regulations to abide by when running their operations--which has only gotten more complicated in the wake of Sarbanes-Oxley. The point is that everything you say in public about the company creates risk for the company and its shareholders. If you say anything wrong, you immediately create the potential for criminal and civil legal troubles for both yourself and the company. There's a whole class of attorneys who represent shareholders who feel wronged for any reason. It makes for a very stressful environment, even when you talk to the analysts. Each one will always be looking for an information advantage, but it's imperative that you say the exact same things to everyone--or potentially pay a price.
It really does make you wonder why anyone would take their company public anymore. Granted, as I have written before, it's not always a walk in the park to be owned by a PE or VC firm either. That comes with its own pressure to make earnings. But many of the other pressures that comes with being public don't exist. While it's not a perfect scenario to be accountable to any ownership group, it's still a better deal on overage than being accountable to the public markets.
So, if you're thinking about your exit strategy, and it involved going public, you might want to reconsider that decision. You might find that it brings more costs, hassles, and risks than benefits in the long run.
