Going Private

Going private is a transaction or a series of transactions that convert a publicly traded company into a private entity. Once a company goes private, its shareholders are no longer able to trade their stocks in the open market. Private equity firms will typically purchase a struggling company, make it into a private entity, reorganize its capital structure, and issue stocks once a profit can be realized.

A company typically goes private when its stakeholders decide that there are no longer significant benefits to be garnered as a public company. Privatization will usually arise either when a company's management wants to buy out the public shareholders and take the company private (a management buyout), or when a company or individual makes a tender offer to buy most or all of the company's stock. Going private transactions generally involve a significant amount of debt.

Companies are often taken private when they need time to restructure their debt or operations prior to becoming a public corporation once again.

A company can go or be taken private in several ways. A management buyout or MBO, noted above, entails company management pooling its resources (often a mix of personal resources, private equity financing, and seller financing) to acquire all or specific part of their business. An MBO stands in contrast to a management buy-in (MBI), in which external management acquires a company and replaces the existing management team.

An MBO has both advantages and disadvantages. Advantages include existing managers’ strong understanding of the business they are taking over – less understanding, if a learning curve is involved. Disadvantages include managers negotiating a potentially challenging transition from being employees to owners, requiring a shift in mindset from managerial to entrepreneurial.

A leveraged buyout (or LBO) is another high profile and relatively common method that can be used to take a company private. In a LBO, acquirers (often a private equity firm) uses a significant amount of borrowed money or leverage to meet the cost of acquisition; thus, LBOs are often done on much larger entities than, say, a smaller startup that could be less expensive. The assets of the company being acquired and assets of the acquiring company are often used as collateral for the loans. LBOs help companies make large acquisitions without having to commit a lot of capital.