Going Public or Staying Private? Borrowing or Finding an Investor?

A Chief Executive Officer (CEO) of a major, privately owned eraser company looking to raise money for his new plant would still want to continue to be the owner of the business. This ownership decision would rule out turning the company into a public corporation. A CEO would likely want to retain as much of the company as he could, which would mean looking for a loan rather than an outside investor.

There are many reasons not to take the company public. These include the CEO wanting to remain completely in control, the pride of ownership, and the fact that there is less expense and paperwork in a private company.

In a public company, the Chief Executive is not in complete control. The shareholders are the owners of the company, and if they do not like the direction the eraser company plans to take, or if the company has a single bad year and loses money, they can fire the CEO. It may take time to grow the company the way the CEO wants it to grow, but the shareholders may want to make money straight away. In fact, the shareholders’ goal is only to make money, but the owner of a private company may have a different goal, such as giving jobs to people from his home town.

There is much more pride in owning a company, rather than being the Chief Executive of a public company. The owner can say that the eraser company is “his,” the company can be named after him, and people will know that the owner or his family built it. And he can invest in the Johnny Depp line without approval from anyone else.

Public companies have to follow rules made by the government and the stock market. To show that they are following the rules, they have to complete a large amount of paperwork, which includes telling shareholders how much profit they are making. It takes an enormous amount of time and cost to produce this paperwork and meet with shareholders. The Chief Executive of a private company does not need to spend time meeting with shareholders and the rules are not as strict, so there is less paperwork. He can also decide how much the company pays him – as all the profits are his.

One Chief Executive, Joe Plumeri, has a slightly different view. Mr. Plumeri is the CEO of Willis Group Holdings Limited, a large insurance broker. When the company was a private business, he decided to change it into a public corporation. He says that one advantage of being public is that the employees know every day how well they are doing. The stock market price tells them this.

If the eraser company owner needs to raise money for his new plant, he should try to do it by borrowing from a bank rather than by selling some of the company to an investor. There are many reasons for this strategic choice. If the company borrows money, it can be paid back later, and the company can return to where it started from. Also, over time, the company can increase in value, so there is a benefit in retaining as much of the company as possible.

When money is borrowed, it can be paid back later, but investors may not want to sell back their share of the company. Borrowing money, therefore, even though it is more risky, allows the owners to continue to own the entire company. If the company grows and becomes more valuable, the investor may have bought his share too cheaply, and the original owner could be giving money away.

In conclusion, owners should always try to keep a company private rather than taking it public (unless they want to sell the company and put the money in the bank). When raising funds, they should always try to borrow the money rather than selling some of the company to a private investor. Although it is more risky, because the money has to be paid back, it allows an owner to keep full ownership of the company which will likely be more valuable later on.

Source:

Plumeri, Joe. Chairman and CEO, Willis Group Holdings Limited. Private conversation. November 21, 2006.