The Advantages and Disadvantages of Private Placements

Many business owners fancy the idea of raising money through initial public offering, but the complexity and expense of going public often makes it impractical for many companies, particularly the small ones. However, there’s a simpler and less expensive alternative method to raise money and maintain a high degree of control of shares distribution. This method is best termed as private placement.

So, what is private placement?

Private placement is similar to IPOs, but instead of being sold to the public, the shares are sold of a small number of private investors, usually mutual funds, banks, insurance companies, etc. Private placements, ideally known as non-public offerings have to be registered with the commission of Securities and Exchange. Additionally, companies don’t need to disclose detailed financial information. For this and other reasons, private placements are often less expensive and complicated than public offerings.

Here are some of the advantages and disadvantages of non-public offerings.

Advantages

Non-public offerings usually give a high degree of flexibility regarding how much capital can be raised, from thousands of dollars to millions. The private investors are usually patient and have lower expectations compared to venture capitalists. This gives the company adequate time to provide a return on their investments.

If you wish to raise money through private placement, you need to first ensure that you have a robust business plan that shows why private investors should come on board.

What’s unique about your company and what sets you apart from competition? Have you invested your own money into the company? How will you grow sales and make consistent profits over the years? How strong is the management team? Do they have experience in growing companies and do they provide a solid return for investors and owners? What about marketing and advertising? You strategy on getting new clients and retaining them should be crystal clear. When it comes to the industry, you need to consider whether it’s on the rise or in decline.

Disadvantages

While non-public offerings allow you to maintain a higher level of control that venture capital or IPO, bear in mind that it needs you to give up some degree of control and ownership of your business. The new shareholders will have a voice in certain aspects including choosing the board of directors. They may also have the ability to vote on critical decisions affecting the business. Ideally, they will gain access to all your financial books and records.

So, is non-public offerings the best strategy the best for your business? Well, if you are looking for a way to raise money or expand your company, it can be an excellent way to raise capital that does not have to be repaid, unlike a commercial business loan that needs to be repaid to a lender with interest.

However, you will have to give up some control over your business and equity dilution. You need to sit down and consider the long term growth of your business and the viability of private placements. Simply weigh the pros and cons before making this crucial business decision.