What it means
Ownership is the defining feature. Shares in a private company usually carry transfer restrictions written into the articles or a shareholders agreement, so an owner cannot sell to an outsider without offering the stake to existing holders first.
The register of members is short, and the people on it generally know each other. The reporting burden is much lighter.
Depending on size and jurisdiction, a private company may file only abbreviated accounts once a year, with no quarterly earnings calls, no analyst guidance and no obligation to explain strategy to the market. That privacy has real commercial value.
Management can accept three years of losses to build a new product line, or hold a price to protect a customer relationship, without watching a share price react the same afternoon. The cost appears when money is needed.
Without a public market the company raises equity through negotiated rounds with a handful of investors, borrows from banks on personal or asset security, or funds growth from retained profit, and each of those routes is slower than a share issue. Valuation is the other complication.
There is no daily quoted price, so a private company is normally valued by applying a multiple taken from listed peers and then reducing it, because a stake nobody can easily sell is worth less than an identical stake that trades every day.
In practice
Real-world examples
Example 1
A family-owned engineering group turns down an approach from a listed competitor because going public would force it to publish margin data its customers would negotiate against. It funds a $12,000,000 expansion with bank debt and three years of retained profit instead.
Example 2
A venture-backed analytics company stays private through four funding rounds. Employees hold share options they cannot sell, so the board arranges a secondary transaction letting staff sell up to 20% of vested shares to an incoming investor at the round price.
Example 3
A private care home operator is valued for an inheritance settlement. The valuer takes an 8 times EBITDA multiple from listed peers, applies a 30% marketability discount and a further minority discount for the 15% stake being valued, and documents the reasoning for each step.
Think of it
A private company is like hosting a private dinner party at home, where you choose the guest list and share recipes only with friends. A public company is like running a busy restaurant, where anyone can walk in, buy a seat, and comment on your menu.
Formula
Calculation
Indicative equity value = (EBITDA x comparable public multiple) x (1 - discount for lack of marketability) - net debt.
A private logistics business earns EBITDA (earnings before interest, tax, depreciation and amortisation) of $4,000,000. Listed logistics groups trade at about 10 times EBITDA, giving an unadjusted enterprise value of $4,000,000 x 10 = $40,000,000. Because the shares cannot be sold quickly, the buyer applies a 25% discount for lack of marketability, so $40,000,000 x 0.75 = $30,000,000. The company carries $8,000,000 of bank debt and holds $2,000,000 of cash, so net debt is $8,000,000 - $2,000,000 = $6,000,000. Equity value for the shareholders is $30,000,000 - $6,000,000 = $24,000,000.Case study
Seen in the real world
Ledgerfield Instruments is an illustrative, fictional maker of laboratory balances owned by its founder and eleven long-serving employees. When a listed rival offered to buy the company, the founder had to establish what the shares were actually worth, having never had a market price to point at.
The adviser started with EBITDA of $3,600,000 and a peer multiple of 9 times, giving $32,400,000 of enterprise value. A 25% discount for lack of marketability reduced that to $24,300,000, and net debt of $4,300,000 brought equity value to $20,000,000. The employee shareholders were surprised, because they had been valuing their holdings against the listed peer multiple with no discount at all, which overstated the equity by $8,100,000.
The board eventually declined the offer and set up an internal valuation reviewed annually, so that leavers and joiners traded at a defensible price. Ledgerfield is invented, but the lesson holds: without a public market, a private company has to manufacture the price discovery that a listing would provide automatically.
Watch out
Common mistakes
- Assuming private means small. Some of the largest businesses in the world are privately held, and plenty of listed companies are tiny.
- Thinking a private company has no reporting obligations. Most jurisdictions still require filed annual accounts, tax returns and a public register of directors.
- Valuing private shares at the same multiple as listed peers. A stake that cannot be sold quickly is worth less, which is what the marketability discount reflects.
Questions
People also ask
Can a private company have thousands of shareholders?
Usually not, because most jurisdictions cap the number of holders or restrict how shares can be offered before a company is treated as public.
How do employees realise value in a private company?
Through a sale of the business, a secondary transaction arranged by the board, a share buy-back, or an eventual listing.
Is staying private cheaper?
Generally yes on compliance costs, but equity capital tends to be more expensive because investors demand a higher return for illiquidity.