Public or Private Company?

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j0387706Consider Your Options Carefully

Choosing to go public or remain private is a decision not to be made lightly.

I was reading an article in the Australian Financial Review on Friday 15 October 2010 entitled “Shareholders can’t run public companies”. It goes on to discuss what shareholders can do to control companies.  This article coincided with a conversation I had with a major shareholder in a public company of which I am director on that same day. The conversation was regarding my proposed re-election as a director at the upcoming AGM and led me to think again about a question I am frequently asked by entrepreneurs trying to raise capital which is “should I stick with a private company or switch to public company status”? I must initially admit my bias regarding this question.

I have dealt with many entrepreneurs both as an adviser and a director and, in many cases, even when companies have accepted external capital, it is difficult to get the company run properly i.e. regular accounts produced, regular board meetings, board papers complete and sent out in advance. This is because many entrepreneurs still think of the companies as theirs to do with as they please, many entrepreneurs are out of their depth in a more corporate environment and many, unfortunately, who have the ability to bring together complex deals through their personal drive are completely unable to manage a business once it is established.

My bias is that where possible, I prefer public companies because the requirements of that status strengthen the hands of the external directors especially where the entrepreneur is still the majority shareholder. The benefits are usually greater transparency, control, liquidity and ability of the entrepreneur to plan an exit.

You may ask what exactly are the additional requirements of public companies over and above those of public companies. The additional responsibilities are that public companies:

  • has to have at least 3 directors
  • has to have it’s accounts externally audited and filed with ASIC
  • has to hold an AGM for all shareholders
  • cannot restrict the transfer of their shares

For most smaller companies the total additional, external cost of public company over private company status is likely to be in the vicinity of $10,000 pa.

When asked the “public vs private” question and putting aside my personal bias, I tell them that the key is the understanding the likely nature of the investors you are looking for. If you get a single large investor who will take an active, possibly executive role in the company, you can probably stick with private company status. If you are looking for a wider range of investors many of whom will not participate actively in the management of the company, then you should probably go for public company status for their benefit.  Additionally, in my view, public company status gives a positive impression to potential investors in that the company will already need to have three directors in place and it also gives a strong impression that the company will be run professionally in that management’s actions will be reported on by the external auditor and the investor (who has almost no rights in a private company) will be able to question the directors at the AGM.

So I would always recommend to entrepreneurs that they choose public company status unless there is a very good reason not to do so.  Beware advisors that only sell the benefits of public listing, their fees are always higher if you take that path.  Take your time to make an informed, logical decision.

Are you considering the decision to go public?  Do you fully understand the pros and cons?  Would you like our help and advice? Please call on +61 2 9258 1972 or go to our Contact page.

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