Capital structure refers to the way a company is financed. Broadly speaking, there are two options: equity and debt; most firms use a combination of these two. Public companies within the same industry usually have comparable capital structures, while the capital structure of privately held business can differ.
If the business is still early-stage, venture capitalists and angel investors may buy stock in a company, in exchange for money and support. It might also be more difficult for private companies to get debt- financed, as banks might be more reluctant due to the higher risk involved.
Moreover, if a public business wants to raise more money, it can issue extra shares easier and quicker than private companies do. For private businesses, an external financing round is often harder and takes more time, as the shares cannot be sold on the stock market. The different capital structures of private and public businesses may also affect the valuation, as different metrics are used.
In general, public companies can provide more assurance of continuing operations than private companies. Investments in private companies often involves more risk, and this is especially the case when it concerns an early-stage business. Although this higher risk may results in a lower valuation for private firms, many investors are attracted by the interesting growth opportunities these businesses offer in the future.
When you are consider partnering up with another company, please remember that the M&A deals covered in the news are the few that stand out. In real life, M&A deals are less glamorous, and certainly not always successful.
This article has been edited and condensed.
Daisy de Vries is the Marketing & Communication manager at Equidam, an online value management tool for small businesses. Her passions are startups, writing and technologies. Keep investors up-to-date in a consistent and efficient way with the Equidam valuation report. The report gives a clear overview of the performance of your company and enables you and your capital providers to understand and manage the value of your business. Connect with @equidamtweets on Twitter.
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