Comparison of Values between a Private vs. Public Company

Converting a private company to a public company results in a substantial increase in value to owners. Statistics published by the U.S. Chamber of Commerce show that most private companies are liquidated rather than sold, because a buyer cannot be found. Their statistics go on to show that sellers of private companies, fortunate enough to find a buyer, receive an average of 4 to 6 times their net earnings. Rarely is the seller cashed out. By comparison, public companies sell at an average of 15-20 times their net earnings even in this down market.

The reason for the premium paid for public companies, unlike a private company purchase is

• investors have no management responsibilities
• investors can purchase a very small portion of the company
• there are over 50 million investors
• investors can get their money back immediately by selling their shares

Example: ABC Manufacturing Company earns $1,000,000. If a purchaser could be found, the company would likely sell for about 5 times earnings. As a private company, the shareholders would get $5,000,000, less commissions. The shareholders of ABC would most likely have to carry back financing to compete with other sellers. ABC would be fortunate to find a buyer because the majority of private companies are liquidated because buyers cannot be found

If ABC Manufacturing, with $1,000,000 in earnings, went public it would be worth about 18 times earnings, totaling $18,000,000. If the owners of ABC sold 25% of their shares to the public, they would receive $4,500,000 cash and still own $13,500,000 in stock of a public company. The $4,500,000 received for 25% of the public company is about the same the owners would receive for 100% of the same company if private. The difference, in the example, is $13,500,000.

Five times earnings for a private company.