The Basics of Private Businesses: A Comprehensive Guide

Starting a private business can be daunting with countless decisions to make. From selecting a structure and location to choosing an industry and marketing strategy, the process can feel overwhelming. On top of that, there's the question of whether to keep the business private or take it public in the future.

While many entrepreneurs choose to keep their business private, there are already 33 million small businesses in America, so you're in good company. Going public can mean more growth and scale, but remaining private gives founders more control. If you're considering starting a private business, it's crucial to understand the various structures, valuations, and legal requirements involved.

What Are Private Companies?

A private company is entirely owned by its founders, private investors, managers, or families. These businesses are not listed on the stock exchange and do not receive public funding. This also excludes government-owned companies. Examples of private companies include family-owned businesses and small or medium-sized enterprises (SMEs). However, it's worth noting that even large corporations can be privately owned.

Private vs. Public Businesses: Key Differences

The main distinction between private and publicly traded companies is how they raise capital. Public companies use the stock exchange, while private businesses rely on investments from venture capitalist firms, banks, and angel investors. Another significant difference is their disclosure requirements. Public companies must share financial information, such as earnings reports and executive compensation, with the Securities and Exchange Commission (SEC). These documents are publicly available, providing transparency and protection for investors. On the other hand, private companies have fewer owners and are not required to disclose their financial data publicly. However, they still need to share key information with the IRS and other government agencies. Private companies can sell limited stock without reporting to the SEC, as long as they comply with Regulation D guidelines. This allows them to sell to up to 35 non-accredited investors, defined as individuals earning less than $200,000 annually and with a net worth under $1 million (excluding primary residences).

The Advantages of Owning a Private Business

Being the owner of a private company comes with several benefits, including:

• Control: As a shareholder, you have complete control over the day-to-day operations and decisions of your business, without the pressure of meeting quarterly earnings expectations.
• Reduced Reporting Requirements: By not having to comply with SEC regulations, private companies can save time and money.
• Flexibility: With no concerns about public perception, private businesses can focus on their desired goals and objectives.

However, there are also potential downsides to taking investments for your private company. "Sometimes venture capitalists can become overly involved in the day-to-day operations, which can have both positive and negative impacts on the direction of the company," says Michael Aswad, CEO of VoM, a cloud accounting software firm. "VCs tend to prioritize growth over profitability, which may present challenges for the business down the line." To avoid any conflicts in the future, it's crucial to outline the roles and responsibilities of venture capitalists in your agreement.

The Drawbacks of Owning a Private Business

While there are certainly benefits of a private business, there are also potential disadvantages, including:

• Limited Capital Resources: Raising money privately can be more challenging, and as a founder, you may be limited in the funds you can bring in.
• Less Liquidity: Private stock is not as easily traded, making it hard for shareholders to gain liquidity.
• Ownership and Management Restrictions: Private businesses are often closely held by a small group of owners, who may have strict regulations on who can own and manage the company. This can make it challenging for outside investors or new management to gain control of the business.

Private businesses come in various forms, such as sole proprietorships, partnerships, and limited liability companies (LLCs). These types of companies are owned and operated by individuals or a small group of owners, known as members, and are not publicly traded. Starting a private business can be a complex process, but with a solid understanding of the different structures and elements involved, you can set yourself up for success. It's essential to carefully consider the advantages and disadvantages and choose the best option for your unique business goals and needs.

What is an LLC and is it Considered a Private Business?

An LLC is one of the most common forms of privately held businesses. It offers flexibility and protection for its owners, as they are not personally liable for the company's debts or legal issues. LLCs are considered privately held companies because the owners have control over the operations and finances, and they are not required to comply with SEC regulations. However, there are state laws and regulations that LLCs must follow, such as registration and licensing requirements.

Although an LLC can choose to be taxed as a partnership and have a publicly traded partnership structure, this is not common for most privately held companies.

How to Value a Private Company

Valuing a privately held company can be a challenging task as there is no public trading market for its stock. One approach is to conduct a comparable company analysis (CCA), where the private company's financial metrics and performance are compared to similar publicly traded companies in the same industry.

Another method is using the price-to-earnings (P/E) ratio. This ratio is calculated by dividing a public company's market capitalization by its annual net income and can then be applied to the private company's financial metrics. For example, if the average P/E ratio of publicly traded lumber companies is 10 and a private lumber company's net income is $10 million, the private company's value would be $100 million ($10 million x 10).

The discounted cash flow (DCF) model is another common method used to value private companies. It takes into account the company's future cash flow and discounts them to determine present value.

Selling Private Company Stock

Private company stock refers to an equity stake in a privately held business. These stocks can be sold to private investors, such as venture capitalists, angel investors, and family offices. Unlike publicly traded stocks, private stocks do not have to comply with SEC regulations.

In addition, private companies may offer employee stock options or grants as an incentive for employees to stay with the company.

Famous Examples of Private Companies

Private companies, especially small businesses, are more common than publicly traded companies. Some notable examples include furniture retailer Ikea, toymaker Lego, watchmaker Rolex, grocery store chain Publix, and kitchen and bathroom appliance manufacturer Kohler.

Some of the largest private companies in the US include:

• Cargill - an agribusiness with an annual revenue of $165 billion
• Koch Industries - an energy, commodities, and consumer goods company with $125 billion in revenue
• Publix Supermarkets - with $48 billion in revenue
• Mars - a candy maker with $45 billion in revenue
• Pilot Company - a truck stop and convenience store operator with $41.9 billion in revenue

Reasons for Choosing to Remain Private

While some large corporations may go public to raise capital, many companies choose to stay private for various reasons. Some of these reasons include a desire for autonomy and control, as seen with family-owned businesses like Kohler. Private companies also have the advantage of making decisions quickly without needing approval from external stakeholders.

Koch Industries, for example, has remained private to maintain focus on long-term success and provide value to customers. The company also reinvests a significant portion of its earnings back into its own companies.

Is Starting a Private Company the Right Choice for You?

Starting a private company can be a challenging but rewarding venture. It's essential to carefully consider your business goals and needs and weigh the benefits and disadvantages of different business structures. With the right understanding and strategy, you can set yourself up for success as a privately held business owner.

Starting a private business may seem like a daunting task, but with the right approach and market opportunities, it can be a highly lucrative venture. Private companies offer owners more control and flexibility, and in today's sewing industry, there are endless possibilities for success.

Unlocking the Advantages and Tactics for Running a Profitable Private Business

A private business is not publicly traded, which comes with certain limitations on transfers and sales. However, there are numerous examples of successful privately held companies that have excelled in their respective industries.

Take, for instance, HubSpot, a leading sales and customer relationship management software, and Vagus Nerve Care, which has grown into a $483 million industry. These privately held businesses have achieved remarkable success.

There are various reasons why entrepreneurs opt for a private business model. Among the common ones are maintaining control, avoiding public scrutiny, and preserving company culture. With the emergence of new industries like legal tech, there are ample opportunities for entrepreneurs to thrive in the private sector.

If you're considering starting a private business, it's crucial to have a solid sales strategy in place. This entails using user-friendly sales software and seeking expert guidance to build a thriving and profitable company.