The Disadvantages of Staying Privately Owned



Many business owners stay private because of concerns with the traditional stock markets.


With ISM, owners can get the benefits of the traditional markets while reducing the expense, time to market and other challenges.


There are several disadvantages that a private business has when compared to a public held company.

The Difficulty in Obtaining Capital

Private business owners who wish to remain private can find it very difficult to obtain needed capital although there are several methods they can use to obtain this capital:  

  1. Private Placement Offerings – These can be difficult to set-up, time consuming and expensive. Most of the investors will be required to be “accredited investors”. The sale of private stock cannot be advertised. There is no market for the private stock which makes it difficult for the investor to ever sell his stock. This lack of liquidity greatly increases the investor’s risk. 
  2. Borrowing from a Bank – The debt reduces the value of the business. The loans are difficult to get and expensive because of the lack of liquidity for collateral. 
  3. Venture Capital – Venture Capitalists require a high rate of return on their investment and they generally want controlling interest in the business.

A Lower Valuation upon Sale or Merger of the Company

The valuation on a privately held company is about 30% lower than for the same company if it were public. This is called “The Lack of Marketability Discount”.

For example: If a public company is valued at $10 million, the same company would be worth at $7 million if it were privately held. This is due to the lack of a market for the private stock. If that same privately held company were to go public, the valuation would increase from $7 million to $10 million, which is more than a 42% increase.

REASONS PRIVATE BUSINESS MAY NOT WANT TO GO PUBLIC

Why do private business owners choose to remain private given the disadvantages they have?

  1. Time and expense of going public (IPO) – This is very expensive and makes all of the company’s inner workings public knowledge. 
  2. Requirement for full reporting – One reason business owners choose to remain private is they like the non-public nature of their business dealings. They are not doing anything wrong; however, they do not wish to explain every expense and decision with the public. They also do not want to share this information with their competitors. The reporting requirements are also very expensive and time consuming. 
  3. Lack of understanding about the stock market – Most private business owners have little knowledge of the inner workings of the public stock market.

THE ANSWER TO THIS PROBLEM

The Independent Stock Market (ISM) is a much less expensive, much faster and less intrusive alternative to going fully public. It provides the capital business owners want and the liquidity their shareholders need. Contact ISM today.