What is a private company? Definition and meaning
A private company, also known as a privately held company or close corporation, is a business whose shares are not traded in a stock market, as opposed to a public company.
A private company’s shares are offered, owned and traded/exchanged privately. Some people refer to them as unlisted companies or unquoted companies.
A private company may also refer to a corporation that does not belong to the state. In the UK, US and other native-English-speaking nations, this meaning is much less common today.
Just because their shares cannot be bought by members of the general public does not necessarily mean a private company is small.
Many of them are household names, including Mars (food drink & tobacco), PricewaterhouseCoopers (business services & supplies), and Dell (technology hardware & equip) in the US, and the John Lewis Partnership (retail) or Virgin Atlantic (airline) in the UK.
According to Forbes, in 2014 a total of 221 private companies in the US had revenues of at least $2 billion. The same journal also reported that in 2008, the 441 biggest private companies in America employed 6.2 billion workers and accounted for $1.8 trillion in revenues.
In many cases, private companies are owned by their founders and/or their families and heirs. Employees may also own shares in a private company. The majority of small enterprises are private companies.
According to Cambridge Dictionaries Online, a private company is:
“A company that is owned by one person or a small group of people, for example a family, and whose shares are not traded on a stock market,” or “a company that is not owned by the government.”
Why do some larger companies opt to remain private?
Many large companies choose to remain private, even though going public would give them access to funds from the general public. Why? Below are some reasons:
You lose your privacy: public companies have to adhere to a raft of regulations, and file financial reports much more often. The salaries, stockholding and option holdings of key officers must be disclosed if you work in a public company.
As a director in a private company, you are not likely to receive letters from shareholders asking you to explain your paycheck – in a public company you will.
Fluctuating stock prices: even if your company is doing well, its share price could plummet if it is listed on a stock exchange when the overall economy takes a downhill turn. If employees own shares, a declining stock price can destroy morale.
You lose control: you could even get kicked out if share prices fall too low, someone buys up lots of them … and does not like you. This happens when you work in a listed company, which uses other people’s money.
Rivals will know more about you: as a listed firm, your competitors will know much more about your company’s margins, pricing, profitability and financial structure. It will be much easier for them to find your Achilles heel, and devise a more effective way to beat you.
If your rivals are private companies, they will know much more about you than you will about them (if yours is not a private company).
Do you want to become a prophet? Your shareholders, and the market in general, will expect you to make forecasts on how you think your company will fare in future quarters. If your predictions are not accurate, you will be criticized and ridiculed.
Say goodbye to long-term plans – in a private company you can sit with the other shareholders and work out long-term plans. In a public company, with possibly thousands of different stockholders, investors are much more interested in what their dividends will be this quarter and perhaps the next.
This hunger for money today and no jam tomorrow means you are much less likely to persuade stockholders to back a 10-year plan. Do you want to end up pleasing analysts by making decisions that yield short-term results at the expense of a better longer-term strategy?
Going public is expensive: – floating a company is neither easy nor cheap. You will be swimming in a pool of bankers, lawyers, accountants and providers of data, who will all be pushing for a slice of the cake.
The cost of floating a company can range from $1 million (no small amount in itself) to several million. Add to this the underwriting fees charged by investment bankers (maybe 7% of the total offering).
Then, when the float is over, there are several ongoing annual costs, for example, compliance costs average about $250,000 annually.
American technology journalist and author Sarah Lacy once said:
“One of the nice things about being a private company is operating without the intensity of public glare. It’s hard to grow a company under a microscope of constant second guessing.”
Private Equity: refers to the stocks (shares) and debts of private companies.
Video – Difference between private and public companies
Prof. Hal Kirkwood, who works at Purdue Libraries, explains the differences between public and private companies, and how that may affect how much information you can find on each.