Profit Minded

4 Reasons Private Companies Matter – A Lot

Private Companies

Wall Street may get the headlines, but did you know that of the 27 million businesses in the U.S., less than 1 percent are publicly traded on the major exchanges? The rest are privately held, and these private companies represent a vital segment of the U.S. economy.

Here are four reasons to learn more about private companies.

Private firms dominate. Out of the 27 million firms in the U.S., nearly all are privately held. Even among the 5.7 million firms with employees, less than 1 percent of them have shares listed on a U.S. exchange. And private firms are a growing majority of U.S. firms. The number of companies listed on U.S. exchanges has fallen from more than 7,000 in 2000 to fewer than 5,000 in 2012, according to statistics from the World Federation of Exchanges.

It’s true that many private firms are small. But one look at Forbes’ annual list of the biggest private companies in the U.S. shows that some really big companies are privately held. In fact, private firms accounted for 86.4 percent of U.S. firms with 500 or more employees,  according to 2010 estimates, so even among large firms, private owners abound.

Private firms create wealth and jobs. The U.S. government says small businesses, which it defines as those with fewer than 500 employees, drive 46 percent of private nonfarm GDP, based on data from 2008, the most recent year for which source data are available.  Small businesses since March 2010 have also provided slightly more than half of the net job gains in the private-sector economy, according to the SBA.

While many of the nearly 27 million private companies may also be classified as "small businesses" and therefore count toward the stats listed above, as also outlined above, there are also many other private companies (not publicly traded) that are much larger and are not included in the “small business” figures. So, if you consider the impact that these large, private companies also have on GDP and employment, the significance of private companies is even clearer.

Another study by the SBA found that privately held firms (both employer and nonemployer) generated 36 percent of all sales and receipts among U.S. firms (including public and non-profits) in 2007.

But other researchers have estimated that in 2010, private U.S. firms accounted for nearly 59 percent of sales and nearly 49 percent of aggregate pre-tax profits.

Private firms invest more in growth. Researchers from Harvard and New York University have estimated that in 2010, private U.S. firms accounted for nearly 53 percent of aggregate non-residential fixed investment, indicating that private companies are a major driver of business expansion.  The same study found that privately held companies invest substantially more than do publicly traded companies of similar size and industries. Using private-company data from Sageworks, the researchers matched a sample of private firms with public companies and found that private firms, on average, invest nearly 7 percent of total assets each year, compared with only 4 percent investments for similar public firms.

Private firms respond quickly to growth opportunities. Not only do private firms invest more in growth, but they also are more sensitive and responsive to opportunities for capital expenditures and mergers and acquisitions than are public companies – even during the recent financial crisis. The Harvard and NYU researchers determined that private firms were more than four times more responsive to changes in investment opportunities, reinforcing the stereotype that private companies are more nimble than their public counterparts.

Mary Ellen Biery is an Sageworks, a financial information company, collects data on the financial performance of private companies through a cooperative data model with accounting firms and financial institutions.

Mary Ellen Biery is a Research Specialist at Sageworks. Sageworks, a financial information company, collects and analyzes data on the performance of privately held companies and provides allowance for loan and lease losses solutions to the banking industry.

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