Why ownership changes as a business grows: finance and standing

1. A sole trader or a partnership suits a business at start-up, but growth exposes two limits that a change of ownership fixes.
   1. Finance: the owners' savings, the profit the firm keeps back and what a bank will lend against those run out once growth means new premises, machinery or a national advertising push.
   2. Standing: suppliers and lenders treat a registered company that files accounts at Companies House as more permanent than one person trading alone, so they offer larger trade credit limits and better loan terms.
2. Most growing firms become a private limited company first, and the small number that need capital on a national scale then take one further step.

Becoming a plc: shares anyone can buy

1. The legal difference from an Ltd is who may buy the shares, because an Ltd sells them privately to people the existing owners approve while a plc sells them to anyone with the money to pay.
2. That one change is what raises far larger sums, and it brings three gains.
   1. Large amounts of capital: thousands of investors each buying a small stake add up to sums no handful of private shareholders could put in, enough to fund a nationwide roll-out or a new factory.
   2. Profile and credibility: a listed company's results are reported in the press, which makes suppliers readier to deliver on 60 days' credit and banks readier to lend at a lower rate of interest.
   3. Shares that are easy to sell: a holding can be sold on any day the stock exchange is open, so investors risk their money more willingly and the next share issue is easier to sell.
3. Money raised by selling shares is not a loan, so there is no interest and no repayment date, which means a bakery chain like Greggs could fit out and stock a run of new high-street shops without adding a monthly repayment to its costs before those shops earn anything.

The price of floating: cost, scrutiny and takeover

1. Floating costs the business in five ways, and each one is a reason many profitable firms never do it.
   1. Cost and complexity: the company must pay lawyers, accountants and a bank to handle the sale and to produce a legal document setting out its finances, and those fees run into hundreds of thousands of pounds before one share is sold.
   2. Public and press scrutiny: a plc publishes detailed accounts, so competitors can read its sales and costs and reporters cover every fall in profit, which can knock customer and supplier confidence.
   3. Loss of control: founders who sell part of the company keep a smaller share of the votes, so a decision they oppose can be carried against them at the annual meeting of shareholders.
   4. Open to takeover: nobody chooses the buyers, so a rival that quietly builds a holding of more than half the shares takes control of the company and can replace its managers.
   5. Pressure for short-term profit: shareholders want a dividend now and a rising share price, which pushes managers to cut spending on staff training and new products that would only pay off in five years.

Judging whether a growing business should become a plc

The owners of a successful Ltd have three routes, and the table sets out what each does to their finance, their control and their exposure.

1. Floating is most attractive when the business needs very large sums and the owners are willing to trade some control for faster expansion.
2. It is less suitable when the funding need is modest or the founders strongly value privacy, family control or protection from takeover.
3. Overall, a business should float only when the scale of its growth plan justifies the cost and loss of independence.