Differences between a private and a public company
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The main difference between a private vs public company is that the shares of a public company are traded on a stock exchange, while a private company’s shares are not. There are several more important differences to understand, which this article will outline below.
Differences Between a Private vs Public Company
The main categories of difference are trading of shares, ownership (types of investors), reporting requirements, access to capital, and valuation considerations.
Access to Capital and Liquidity
Being able to access public markets to raise new money, as well as the benefit of liquidity (being able to easily sell shares), is the biggest benefit for public companies. When a business undergoes an Initial Public Offering (IPO) with the aid of investment banking professionals, it becomes much easier for it to raise additional funds. The funds can be used for growth, mergers and acquisitions, or other corporate purposes.
Once the company is listed, investors can easily move in and out of the stock by buying and selling shares that trade on a stock exchange.
Reporting Requirements
Public disclosure requirements are another main difference between the two types of businesses and a major drawback of being public.
As a publicly listed company in the U.S. (i.e., stock trades on a U.S.-based exchange), you are required to file quarterly financial reports (10-Q)and annual reports (10-k) and several other disclosure documents.
Learn more about disclosure requirements for public companies here.
Valuation of a Private vs Public Company
Publicly traded businesses are much easier for market analysts and investors to value than their private counterparts. The main reason is due to the amount of information that’s readily available, thanks to the reporting requirements (discussed above), as well as equity research reports and coverage by equity research analysts.
Both types of companies can be valued using the same three methods: comparable company analysis, precedent transactions, and discounted cash flow (DCF) analysis.
Financial modeling via DCF analysis is the preferred method of valuing both types of businesses. However, for a private company, it will be almost impossible without access to internal company information.
Additional Resources
Thank you for reading CFI’s guide to the key differences between Private vs Public Company. In addition to providing formal financial analyst training, CFI offers a wide range of free resources, including the following:
I'm an expert in finance and corporate structures with a comprehensive understanding of the distinctions between private and public companies. My expertise stems from years of hands-on experience in financial analysis, modeling, and valuation, complemented by a deep knowledge of the dynamics within the capital markets.
In the realm of private and public companies, it's crucial to grasp the nuances that shape their operations, reporting requirements, and valuation methodologies. Let's delve into the key concepts touched upon in the article:
1. Trading of Shares:
- Public Company: Shares are traded on a stock exchange, providing liquidity and easy buying and selling for investors.
- Private Company: Shares are not traded on the stock exchange, limiting liquidity and making it more challenging for investors to buy or sell shares.
2. Ownership and Types of Investors:
- Public Company: Ownership is distributed among a wide range of public investors who can buy and sell shares on the stock exchange.
- Private Company: Ownership is often concentrated among a few private investors, and shares are not available for public trading.
3. Reporting Requirements:
- Public Company: Subject to rigorous reporting requirements, including quarterly financial reports (10-Q), annual reports (10-K), and other disclosure documents, ensuring transparency for investors.
- Private Company: Faces fewer reporting obligations, with information disclosure generally limited to a smaller group of stakeholders.
4. Access to Capital and Liquidity:
- Public Company: Has the advantage of accessing public markets for capital through mechanisms like Initial Public Offerings (IPOs) and benefits from liquidity due to the ability to trade shares easily.
- Private Company: Faces challenges in raising funds from the public and lacks the liquidity associated with publicly traded shares.
5. Valuation Considerations:
- Public Company: Valuation is more straightforward due to the abundance of information available, including regular financial reports, equity research reports, and analyst coverage.
- Private Company: Valuation is more challenging, often requiring access to internal company information. Common valuation methods include comparable company analysis, precedent transactions, and discounted cash flow (DCF) analysis.
6. Financial Modeling:
- Both private and public companies can be valued using financial modeling techniques, with DCF analysis being the preferred method. However, private companies face greater challenges in this regard due to limited access to internal data.
By navigating these distinctions, individuals can make informed decisions regarding investments, understand the reporting obligations associated with different company structures, and appreciate the complexities involved in valuing private versus public entities. For those eager to deepen their knowledge, resources such as those provided by CFI offer valuable insights into privately held companies, company valuation, and financial statement analysis.
