Finance: Keeping the firm in the family

PUBLIC VERSUS private is a long-established issue in corporate management. Traditional theory suggests that there is a point in the development of a business where it should go "public", and that there are many advantages in taking this step. These include giving entrepreneurs the opportunity to realise capital gains, and using quoted shares as currency for future acquisitions and development.

To "go public" there is an elaborate corporate finance industry to bring applicants to a full Stock Exchange listing and into junior markets such as the AIM (Alternative Investment Market).

Much less attention is given to the option of "staying private" and not seeking a listing. Few UK "household names" are privately owned - the best known example being the Virgin Group - because the process of "going public" is long established. However, in many Continental European countries, where public stock markets are less well developed, and where there is a stronger tradition of retaining family ownership, privately owned businesses are more prominent.

There are several reasons that could encourage a company to stay private. For example, the level of public accountability is much less for a private company than for a public company. The private company has 10 months after its year end to complete its annual accounts and file them with the Registrar of Companies. The quoted company has six months, but is under pressure from the market and its advisers to publish these before this deadline. This company must also produce "preliminary results" - a full summary of its performance - within 60 days of its year end.

Outside shareholders and the regulations of the Stock Exchange mean that the annual accounts of the listed company are presented as part of a detailed pack of documents that are expensive to prepare, which for practical purposes exerts pressure on corporate public relations. By contrast, the private company is not required to comply with corporate governance guidelines, Stock Exchange listing rules or a number of accounting standards.

The resulting accounts document, although accessible to the general public, is primarily circulated among a narrow group of shareholders and close advisers, and will usually generate little attention from analysts and journalists. As the document is relatively simple, and contains little or no corporate public relations, annual reporting is easier and cheaper than for a public company.

Remaining private does result in a lower level of public disclosure. Although detailed disclosures are now required of transactions and business interests of directors, significant shareholders and people closely associated with them, there are still possibilities for spreading business activities across several apparently unconnected private companies to avoid their being associated with each other.

The managers of a private business do not need to brief analysts, give presentations to investors, issue profits warnings, publish interim accounts, publicly justify their salaries or explain variations between forecasts and actual results.

Although corporate secrecy may be a motive for not going public, the reasoning itself is more complex. Central to this are the objectives of the organisation and its principal shareholders. The absence of a public market for shares makes it impossible for a hostile bidder to intervene. The independent company can develop as it wishes, and is free from market scrutiny of the business's individual parts.

The company may also wish to develop its business organically, or even develop a "dynastic" form of succession by maintaining close family involvement - less easy to achieve on a public market. The UK stock market has often been criticised for taking a "short-term" view and preferring acquisitive stocks that give high immediate growth.

A dynastic approach to succession may be poorly received by the large body of outside shareholders. In some cases, the company's activities may not appeal to a wider market, and the result will be a poorly performing share, which may encourage management to make decisions to please the market that are not necessarily in the best interests of the company in the longer term. In other cases, the private company may be able to achieve a better financial structure. A private company can also absorb more debt than a listed company, which may be a cheaper form of finance than equity.

Wealth management is also a consideration in the decision - listing shares is a way to create a market and, in theory, to allow the founders to realise capital as they wish. There also is tight regulation of share sales by company participators, and a sale could send the "wrong" signal to the market.

"Going public" is a goal for many companies which in practice few successfully achieve. The case for a company to remain private may, in fact, be very strong.

David Chitty is a technical partner with the accountants Chantrey Vellacott and author of `Model Group Financial Statements', published by Accountancy Books, price pounds 48