Comparison of Values - Private vs. Public Company
Changing a private company into a public company results in a substantial increase in the value to shareholders.
Most private companies are liquidated rather than sold, because a buyer cannot be found. Statistics 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 25-30 times their net earnings. The reason being that, unlike a private company purchase
- investors have no management responsibilities
- they can purchase a very small portion of the company
- their investment is liquid, and
- there are millions of investors.
Example: XYZ 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, totaling $5,000,000, less commissions. The shareholders of XYZ would most likely have to carry back financing, to compete with other sellers. The majority of private companies are liquidated because buyers cannot be found.
If XYZ Manufacturing went public it would be worth about 25 times earnings, totaling $25,000,000. If XYZ did a reverse merger into a public shell, and received 90% of its stock, the shareholders of XYZ would own $22,500,000 worth of stock in a public company.
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