The principal difference between public and privately held companies is that public companies have shares that can be publicly traded on a stock market. A privately held company might become a publicly held company by conducting an initial public offering, which is the offering of shares of the company to the public. Becoming a public company entails a number of changes to the firm, including management differences, business strategy, valuation methods and legal obligations. Management of Publicly Held Companies Publicly held companies tend to be run by a board of directors because when a company is publicly owned, the firm will be compelled to increase shareholder value. Shares that increase in value are more desirable for investors, who are then less likely to sell the shares. Publicly held companies thus employ professionals that specialize in increasing shareholder value. Shareholder value is not only considered in the short run but also in the long run. Long-term profit strategy, which might include consideration for the next 10 years of the company, is thus a major factor in public company management. Management of Privately Held Companies Privately held companies are less focused on increasing the value of the company because few shareholders exist. If shareholders do exist, then the shares of the company will not be publicly listed. Privately held companies, however, can have a group of investors. Instead of a board of directors, the business decisions of a privately held company are undertaken by either the business owners or investors. Because managers are less focused on increasing the value of the company in the short term, it can have increased flexibility in short- and long-term business decisions. Legal Obligations Publicly owned companies, because they are partially owned by the public, are obliged to disclose corporate financial information. This is because of government legal requirements. In the United States, these legal requirements are set by the Securities and Exchange commission, which mandates that publicly held companies issue financial reports on a quarterly basis. These reports include profit statements and future forecasts, and are prepared by a certified accountant. The companys shareholders can then take the appropriate investment decisions. Privately owned companies, by contrast, do not have to take such measures. Valuation The management structure and legal obligations of public and privately held companies has an effect on valuation. Remember that when more of a certain share is bought, the value goes up, and vice versa. With publicly held companies, the shares are listed on the stock markets. If an investor sells his shares, these shares can easily be repurchased by another investor. In contrast, it is not as easy finding a buyer for stock of privately owned companies because investor circles are smaller and less information is known about the firm. Thus, the value of privately owned companies may fluctuate more than that of publicly owned firms. youtu.be/6wL78P75YG8
Posted on: Thu, 31 Jul 2014 18:08:48 +0000