Reasons Why Private Companies Stay Private for Easier Financing

Private company financing is in many ways easier to get as you don’t have the regulatory hurdles you would as a publicly traded company on a stock exchange.  The most important reason why some companies stay private instead of going public though is being able to keep control of the business, making decisions which generally are best for the long term success of the organization.

Shareholders complain to management and directors through primarily stock performance, rather than necessarily the business performance.  Stagnant growth or maintaining profits are not sexy enough for most stock analysts and shareholders, while in a private company the owners’ can think about the long term health of a company and make decisions based that way.  Think of it another way, the owners’ don’t have golden parachutes, their retirement strategy is to build the strength of their companies in order to hand it down to family or sell it for a healthy profit.  This kind of decision also mirrors how private companies are financed such as below:

1. Credit card
2. Operating lines of credit
3. Operating assets lease financing
4. Accounts receivable financing
5. Mezzanine Debt
6. Subordinated debt
7. Private equity financing

These financing methods apply to start ups to established companies and each a have purpose in the growth or the business life cycle and also reflect the amount of equity a company is willing to give up in order to attain growth.  The earlier stages are boot strapping a company to growth with equity being grown by the owners and the later stages are potentially giving up equity for orderly succession or exit strategies.

Written by Richard Wong, CMA     rwong@firstchoicecapital.ca