How To Find & Invest In Profitable Private Companies

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By Michael Sterling

Private companies are like yacht clubs. Unless you are in some way affiliated with them or offer great incentives, the chances of you being a part of it are slim. But don’t think just because a club is hard to get into that it’s impossible. In fact there are many private companies who have been known to share the wealth.

One of the most charming things a private company has going for them is the fact that it’s run by it’s founders. For this reason, most companies have a clearer vision of their goals with little interference from the public. This is why most private companies have longer success.

Forbe’s America’s Largest Private Companies list, shows that private companies bring in high revenue, despite the common misconception. On top is Cargill, the food, drink and tobacco giant, which brings in $134 billion in revenue. Ernst & Young brings isn’t too far behind at #8 with a revenue of $24.4 billion. With all this cash at their disposal, how can we be a part of it?

Are Private Companies More Profitable? 

It’s easy to say that private companies are a risky investment since they’re not required to disclose financial information to anyone because they don’t trade stock on a stock exchange. This, of course can scare some investors away. After all, the number one rule of investing is to research the company’s data.

However, private companies have a nice advantage: they don’t answer to stockholders. Since they rely on private funding, the capital can increase tremendously, regardless of expansion.

A common goal among public companies is to increase profits for shareholders, but private companies seek to minimize their tax bites which allows for a more fluid infrastructure. Most importantly, it can almost guarantee a solid annual return, since their profits aren’t buried beneath tax payments.

Trade Your Shares With An Employee

One of the ways private companies raise their capital is by offering stock ownership for their own employees. It motivates them by tying a portion of their returns to the company’s. Those who have shares usually go through a buyback program within the company, however, there are those who may be willing to sell their shares. They own them after all.

*Here’s a tip: If you know someone who was employed by a private company and has shares, try offering something that may be lucrative for them. Make it more appealing than their company’s buyback program. You never know, you have hit the gold mine if it ever decides to go public. 

Arm’s Length

One of the greatest ways to invest in private companies is at a distance. By being an “arm’s length” investor, you won’t have active participation of the day to day operations in the company, however the status you receive may be the equivalent to of owning a few shares in a publicly-traded company.

*Tip: don’t focus on billion dollar companies, they have enough investors to last a lifetime. Instead, put your attention on  growing companies, and I’m not just talking about start-ups. There are medium-sized private businesses that are gaining momentum. Get in their circle and ride the wave with them all the way to the top. 

Bankruptcy = Cheaper Shares

The word “bankruptcy” may turn you off, but it can actually be a great asset. When a company is bankrupt, it can offer shares of great value at a low price for an investor. Take advantage of it! A private company depends on people like you to keep it afloat, so they must bend their costs accordingly.

Figure out why they went bankrupt. There are many things that can attribute to it. If the company has potential in a good market, often times, it was because of bad management. If this is the case, you might have to have a bigger role. But if they have loyal consumers, you won’t have to do much.

*Note: Do a little bit of investigating before you put your money down. Bankrupt businesses are high risk, but can also be extremely profitable.