A public company sells a certain amount of security or stock in the company to the public.
There are many differences between publicly held companies versus privately owned companies. For example, publicly held companies are owned by shareholders and must disclose financial information to the public. Such disclosure is not required by private companies. The methods of raising capital are also different.
Ownership
The main difference between publicly held companies and privately held businesses is in regards to ownership. Privately held companies are owned by a single individual or a small group of shareholders. Publicly traded companies have chosen to "go public." Going public involves selling an initial amount of security or stock in the company to the public. Individuals who own stock in a company essentially own a portion of the company. Publicly held companies can be vulnerable to hostile takeovers where entities may choose to purchase a controlling number of shares sold on the open market. Once public, a company must answer to shareholders and disclose information regarding the company's profits. Flexibility is sacrificed, as a company may require shareholder approval regarding decisions.
Valuation
In terms of a company's valuation, publicly held companies tend to be valued higher than privately owned ones. Publicly held companies can be valued at up to 20 times of their earnings, whereas privately owned businesses are generally valued at one to five times their earnings. There are multiple reasons for this discrepancy. Stock in privately held firms tends to be more difficult to sell, lowering their value. Publicly held companies tend to be more resistant to economic downturns than privately held businesses in the same industry. This resistance results in higher valuation for publicly held businesses.
Regulation
Publicly held companies are required to disclose information as defined by the Securities Exchange Act of 1934. Publicly held companies file reports with the U.S. Securities and Exchange Commission (SEC). The information in the report may include quarterly earnings, information on operations, financial statements as audited by a certified public accountant and information on contracts and lease agreements. The report also includes salary, benefits and transactions between officers, directors and particular shareholders. In contrast, information on privately held companies is more difficult to obtain; privately held companies do not sell stock on the open market.
Raising Capital
Most companies choose to go public to raise capital. This could be due to difficulty in obtaining venture capital or because the amount needed is greater than $5 million. The company may also need a large amount of capital that does not require being paid back to the lender. Publicly held companies are also able to generate additional capital through a secondary offering on the stock market. Additionally, employees may be attracted and retained through the benefit of stock ownership as part of their benefits package. Owners and majority shareholders can also sell their shares as part of an exit strategy with the company. Privately held companies must raise capital through venture capital investment, angel investors, loans and other means.
Going Public
Going public can be a difficult process. Due to the difficulty and the disadvantages of being public, such as disclosure of information and shared ownership with stockholders, many companies choose to not undergo the process. A company must find an investment banker that has done an initial public offering in similar scope and size to the one they require. The process is costly, sometimes 25 percent or more of a company's equity. The amount of funds raised can be upwards of $5 million or more. Privately held companies can raise funds through other means that are considerably less difficult and costly. They may obtain loans from banks or other institutions, seek capital from venture capital institutions, obtain funding from angel investors or raise capital from asset-based loans. Though not easy to obtain, these methods of raising capital can be less costly.
