Private companies that choose to stay private do so for a number of reasons, a big one being that their business plans and finances remain out of the public eye. They avoid SEC rules and regulations and having to create sleek annual reports. They also get to focus on long-term goals in a way public companies — always considering how the market and shareholders will react — may not. While public companies and corporate management teams can get swept up in short-term results, private companies can spend quality time focusing on their long-term strategic goals.
Remaining private can make a company more nimble when it comes to decision-making, said Doug Gawrych, Grant Thornton’s national managing partner, Private Company Services. For example, a private company could decide relatively quickly to make a substantial investment in infrastructure that would pay off over time but might not look as bright if it were in a near-term public quarterly earnings report. “Private companies have the flexibility of running the business and making decisions based on whatever the vision of the company is for the long term,” Gawrych said.
“And long-term strategy is easier to lay out when fewer stakeholders are involved. Because of that, you have more agility in executing that strategy.”
Bruce Benesh, partner-in-charge of Grant Thornton’s Human Capital Services, agreed: “Companies that are privately held often have a flatter organizational structure. And that ties into their ability to be agile. The speed with which they can make decisions is oftentimes much faster than you can make in a public company.”
Access to capital markets is a chief reason companies go public, yet that particular advantage may have lessened, Gawrych said. “Capital access really comes and goes in terms of how much of an advantage it is to be public. I would say in today’s environment, there is plenty of money out there.” Private companies that have been in business a while tend to have access to capital through their banks, by using assets and inventory as collateral, he said. They can also raise funds through bringing in an outside investor.
Being able to flexibly structure compensation plans is another reason to stay private, said Benesh. “Some family-held and closely held businesses have gone public to have currency in their traded stock in order to have the right kind of compensation plans,” he said. “Yet there are opportunities to develop compensation plans that do not require going public, and these plans have more flexibility in terms of structure than in a public setting.” For example, a phantom stock plan or simulated equity plan can create tremendous alignment long-term between a company and its people and can do so with extreme flexibility. Private companies can align the compensation goals of shareholders with the desires of executives who are making it happen, without needing public approval.
“Private companies also have much less risk of litigation than public companies have with shareholder class-action suits when shareholders don’t like a move or when stock prices fall.”
Private companies may be better prepared to weather downturns Companies that can make decisions on a decentralized basis, as private companies usually do, often fare better when the economy weakens, said Grant Thornton’s Doug Gawrych, national managing partner, Private Company Services. “Local operations are generally closer to what’s going on in that particular market and with those particular customers, and tend to make decisions better than those made at the corporate level,” Gawrych said.
Private companies can be more adaptable in times of uncertainty, for example by moving quickly to invest in technology for long-term cost reduction and efficiencies while the economy is strong.
They can more easily reduce debt to a level that is manageable, said Gawrych. “You see companies that have headcount reductions as they go into a downturn. I think it’s the companies that look at other alternatives — different types of compensation plans, reduced schedules, furloughs — where you can keep the majority of your workforce and talent base in place. That is going to put you in a much stronger position as the economy gets stronger. And then having your strong workforce makes you much more competitive.”
Bruce Benesh, partner-in-charge, Grant Thornton’s Human Capital Services, agreed. “It’s just harder for public companies to make decisions speedily,” he said. “And that goes back to customizing compensation arrangements so that when you run into situations such as the downturn in 2008 and 2009, retaining your people can make a big difference. It’s a more cumbersome process to make decisions and implement changes in public companies. That’s a big advantage for private companies.”
Having an ‘acquiring’ mind
It used to be that a significant benefit of going public was to use stock as currency to make acquisitions, said Gawrych. “In today’s environment, private companies can go to investors or find other ways to finance acquisitions without having to go public.” Private companies most often use cash to acquire a company or assets such as talent, as a way to promote growth or to enter a new geographic or demographic market.
“In certain situations, such as with a family company or family office, the decision-makers can be much more patient with their capital,” said Benesh. “They can make investments and do deals that a public company would have a hard time with because of needing to demonstrate more immediate results. A private company can hang in there a lot longer and make a slower transition to building a business.”
Times are changing and so too are private companies
In fact, because of all these factors – not to mention cost, market volatility and regulations – fewer public companies exist today than even a few years ago.
“The number of public companies is getting smaller,” said Gawrych. He believes private equity is playing a big role in taking public companies private.
“Often you’ll see private equity acquire a public company and take it private, using that company as a platform to go out and make additional acquisitions to grow and add value before taking them public once more.” They see the same advantages in being private that others do — a smaller decision-making body, no independent outside sources overseeing strategy, no shareholder pressure. The speed at which they can operate is a huge advantage.
The past few years have seen family businesses begin to function much like private equity does, making investments in other private companies. “And they’re behaving in the same way as private equity,” said Benesh. “You see decisions in terms of how long to hold onto an investment, how to exit that investment and so on. In short, they have become investment companies more than just family offices.”
At the same time, families or private companies that may be considering going public are waiting a lot longer to do a public offering in order to capture more value, he said.
“The bottom line is, private companies have plenty of options,” added Gawrych. “What they don’t have is all the regulation and scrutiny that public companies do. Many of them are happy to stay private.”
National Managing Partner
Human Capital Services
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