PLCs and Growth Finance

Growth has a price tag

A business that wants new premises, new products or a rival's customer list needs cash to get them. So growth always raises two questions, and the exam asks both. Where does the money come from? And who owns the business once it has arrived? The second one is the one students forget, and it is usually where the marks are.

Ltd or plc?

Both are limited companies, so both give their owners limited liability: if the business fails, shareholders lose what they put in, not their homes. The difference is who is allowed to buy in.

The day it floats

A growing company becomes a plc. What has actually changed?

• Its shares can now be bought by the general public on a stock exchange
• Its owners now have limited liability for the first time
• It no longer has to pay tax on its profits
• The original owners are guaranteed to keep control of the business

Four ways to pay for growth

Edexcel names these four for a growing business. Learn what each one IS before worrying about which is best:

Match each source to its main drawback

How much is left to reinvest?

A company makes a profit after tax of 80,000 pounds and pays 30,000 pounds of it to shareholders as dividends. How much retained profit is available to finance growth, in pounds?

Why sell shares instead of borrowing?

Select the TWO genuine advantages of raising share capital rather than taking a loan.

• The money never has to be repaid to the shareholders
• There is no interest to pay, whatever happens to profits
• The original owners keep exactly the same level of control
• It is always the cheaper option in the long run

The number that decides who is in charge

Ownership of a company is measured in shares, and anyone holding more than 50 per cent controls it. So every share issue is a decision about power, not just cash. Founders who sell 60 per cent of their company have raised a great deal of money and lost the ability to decide anything. It also opens the door to a takeover, where a rival buys a controlling stake on the open market. That is the trade-off an evaluation answer has to weigh: the most money comes with the least control.

Finance the expansion

A profitable family bakery with three shops wants to open twelve more within two years. Work through the decision.

• Twelve shops need far more cash than the bakery earns in a year. What does that rule out on its own?
• The family are clear that they will not give up control of the business. What does that point to?
• What is the honest drawback of that choice, which a good answer would state?

Which fits this one?

A software business is not yet profitable, needs a very large sum to grow fast, and its founders are willing to give up some ownership to get it. Which source fits best?

• Share capital, since it raises large sums and needs no repayment
• Retained profit, since it costs nothing
• Selling assets, since it is quick
• Loan capital, since it keeps ownership intact

Going public

A company whose shares are sold to the public on a stock exchange is a _____, and the process of becoming one is called _____. Profit kept in the business rather than paid out is _____. Borrowing brings in cash without losing ownership, but carries _____. Anyone holding more than _____ per cent of the shares controls the company.

Recommend and justify

A successful independent gym chain with six sites wants to open forty more across the country within three years. The two founders are ambitious and say they care more about scale than about owning every share. Recommend how they should finance the growth, and justify your choice.

• Name the source of finance you recommend
• Give two reasons it suits this business specifically, using the details in the case
• State one genuine drawback of your recommendation, honestly
• Explain why you would still choose it despite that drawback
• Use the words control, dilution and repayment correctly at least once each