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Business planning - Types of business

Theory 2 - Public or private - which is best?

Before looking at this section it may be worth making sure that you are fairly clear about the differences between private limited and public limited companies. These are all set out in the explanation section.

Various factors come into play when a firm has to decide whether to be a public or private limited company. In recent years a number of firms have reverted to private ownership after being publicly listed - the most famous example perhaps being Virgin which was bought back by Sir Richard Branson after it was floated. He was unhappy with the way the market was valuing the shares.

This tells us one of the key factors in becoming a publicly quoted company, and that is that the company is left to the vagaries of the stock market to value it and this may be driven by factors other than those most important to the company and owners.

Other issues that may be relevant for public companies are:

  • A loss of control that the original owners may face when the shares are floated on the Stock Exchange.
  • The initial size of the business - often small businesses that can relatively easily be set up as private companies may not have the capital required to become a public company - the minimum share capital necessary is £50,000 and the legal requirements can be expensive in terms of legal fees, etc.
  • A divorce between ownership and control - the company is owned by the shareholders who have bought through the market, but is run by the Board of Directors. Though the shareholders may have ultimate say on the composition of the Board, this is difficult to enforce in practice and this may lead to this divorce between ownership and control with the owners and managers potentially having different objectives.
  • The company may become an easier target for takeover as the shares are publicly traded.

There is a business planning case study that you may like to have a go at when you have looked through this section.