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Private vs Public Company

Differences between a private and a public company

What is a Private vs Public Company?

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.

 

Private vs Public Company

 

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, valuation considerations, and risks.

 

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 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 the 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 requirement 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 value 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

CFI is the official provider of the Financial Modeling & Valuation Analyst certification.  In addition to providing formal financial analyst training, CFI offers a wide range of free resources, such as the ones below:

  • Privately held Company
  • Private Company Valuation
  • Analysis of Financial Statements
  • Financial Modeling Guide

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