External growth - advantages and disadvantages
The advantages and disadvantages of external (inorganic) growth
Advantages of external growth include:
- competition can be reduced
- market shareThe percentage of a market taken by a particular business or product. can be increased very quickly overnight
Disadvantages of external growth include:
- it can be expensive to takeover or merge with another business
- managers may lack the experience to deal with the other businesses
Public limited companies (PLCs)
As a business grows, it may choose to become a public limited company (PLC). In a PLC, sharesFinancial stakes in a company or business. are sold to the public on the stock marketA centralised market where business shares are traded.. People who own shares are called âshareholdersâ. They become part owners of the business and have a voice in how it operates. A chief executive officer (CEO) and board of directors manage and oversee the businessâ activities. When a business sells shares on a stock market, this is known as âfloating on the stock exchangeâ.
Advantages of being a PLC include:
- the business has the ability to raise additional finance through share capital The money raised when a business becomes a public limited company by offering shares in the business in return for capital.
- the shareholders have Limited liability When the business owner or owners are only responsible for business debts up to the value of their financial investment in the business.
- there are increased negotiation opportunities with suppliers in terms of prices because larger businesses can achieve economies of scale Where the average costs (of production, distribution and sales) fall as the business increases the amount of product that it produces, distributes and sells.
Disadvantages of being a PLC include:
- it is expensive to set up, requiring a minimum of ÂŁ50,000
- there are more complex accounting and reporting requirements
- as shares are publicly traded, there is a greater risk of a hostile takeover A takeover of one company (called the âtarget companyâ) by another (called the âacquirerâ) that is accomplished without the agreement of the target companyâs management. Instead, the acquirer approaches the companyâs shareholders directly or fights to replace the management to get the takeover approved. by a rival company