Five Stages of Small Business Growth - Assignment Example

Small Business Question 1 a) For each firm, identify the reasons given for seeking listing on the exchange (100 words). For Costa Group Holdings Limited (Costa), the listing on the exchange was aimed to: (1) offer the company access to capital markets and provide additional financial flexibility in the company’s quest for more opportunities for growth; (2) enable the company to get finances required for repaying current debts as well as the coupon on the Redeemable Preference Shares; (3) offer a liquid market for shares; and (4) enable current shareholders to benefit from part of their outlay in the company (Costa Group Holdings Limited, 2015). For Adairs Limited (Adairs), the purpose of seeking the listing was to: (1) enable current shareholders to benefit from part of their investment in the firm; (2) offer a liquid marketplace for shares; (3) repay current debt and provide the company with access to markets for capital in order to augment the flexibility of managing capital; and (4) help the company to attract and retain quality employees (Adairs Limited, 2015). b) Compare these reasons with those identified in the topic notes (200 words) One of the points noted in the topic notes and in other sources of literature (e.g. Ghosh, 2009) is that companies seek to list on the stock exchange in order to raise capital and build their business by establishing and offering new shares to potential buyers. This point is clearly evident in both Adairs and Costa’s decision to seek listing on the Australian Securities Exchange. For instance, Costa noted that it aimed to obtain finances to pay debts and seek growth opportunities among other things. Similarly, Adairs noted in its prospectus that it wanted to obtain funds that could enable it to repay debt and stimulate further growth. It is apparent from the prospectuses of the two companies that by going for the public offering, they aimed to get funds that they could use in different ways to pursue growth. For instance, both companies also wanted to use the funds obtained to offer liquid market for shares, which is one of the purposes of public offering that is indicated in the unit notes. Further pursuits of growth by the two companies through the public offering include the need to attract and retain quality employees and the need to ensure that shareholders benefit from part of their investment. Question 2 Classify each of your firms according to the lifecycle stages identified in Churchill and Lewis’s (1983) five stage model. Provide detailed justification for your choice of category (300 words). Churchill and Lewis (1983) identified five stages through which firms develop. In the first stage, which is referred to as the existence stage, the firm is preoccupied with ensuring that the basic business is viable. For instance, it has to obtain customers and deliver the service or products contracted for. The second stage is referred to as survival, whereby the business has shown that it is a functional business entity. The business has adequate customers and satisfies them as required. The main concern of the firm at this stage thus shifts from sheer existence to the correlation between costs and revenues. In the third stage or the success stage, the business has established itself, and the owners have to decide whether to pursue growth or to concentrate on creating a stable business that can allow the owner to disengage from the business to pursue other activities. At stage four or the take-off stage, the key challenge of the business is to attain rapid growth as well as financing of that growth. The owners of the firm thus contemplate issues such as delegation of responsibilities in the firm and how to get funds to support the firm’s growth. Finally, in the fifth stage or the resource maturity stage, the main concern of the firm is to consolidate and have control over the financial benefits that arise from rapid growth, and to retain the advantages associated with the small size of the firm. Both Costa and Adairs can be said to be in the fourth stage (take-off stage) of the growth life cycle. This is because each of the two firms has been able to establish a customer base and deliver products that the customers require. Both firms have also enjoyed success in that Costa is “Australia’s largest horticultural company and is the largest fresh produce supplier to the major Australian food retailers” (Costa Group Holdings Limited, 2015, p. 4) while Adairs has “grown from a family-owned specialty chain to a leading national specialty retailer of home furnishings in Australia with an expanding network” (Adairs Limited, 2015, p. 6). The two firms are now in a position where they are seeking funds to enable them grow further and for their shareholders to benefit more from their investment, as outlined in the companies’ aims of listing. Question 3 a) How much debt does each of your issuers have before the float and how much will they have at listing? (100 words) Before the float (as of 28 December 2014), Adairs had a statutory debt (based on cash and equivalents) of $15.527 million. It was projected that the pro forma debt after adjusting for the impact of the float would be $11.472 million. The forecasted statutory debt as of 25 June 2015 is $1.989 million (Adairs Limited, 2015). For Costa Group Holdings Limited, the statutory net total indebtedness of the company before completion of the offer was $211 million. This changed to a pro forma debt of $97.1 million upon completion of the offer. The projected pro forma invoice as of 26 June 2015 is $123.3 million (assuming that public offer was completed) (Costa Group Holdings Limited, 2015). b) Relate the levels of debt to the reasons for listing in Part One (100 words). It can be seen that in both companies, the level of debt before the initial public offering is higher than the level of debt after the public offer. This is because both companies had indicated that one of the reasons why they sought to list on the exchange was to obtain funds to repay their existing debts. Hence, there is an indication that upon receiving the funds from the float, both companies would use the money to settle part of their debts. This explains why the levels of debt after the public offering are lower than the initial figures for both companies. c) Identify the sources of debt for each of your issuing firms. Are these sources consistent with those you would expect from your study of the unit materials? (200 words) For Costa, the sources of debt include current and non-current borrowings, capitalized loans, financial derivatives, and drawn debt (Costa Group Holdings Limited, 2015). On the other hand, Adairs’s sources of debt include capitalized loans, current and non-current borrowings from various sources such as banks, and drawn debt (Adairs Limited, 2015). These sources of debt are consistent with the sources that can be expected in the unit materials as well as other sources of literature since they are the common ways through which firms get access to debt. In essence, firms usually incur debt to leverage the investment that they have already made so as to grow further without necessarily having to bring in additional investors (Resch, 2011). For instance, firms may borrow to purchase stock, buy equipment and so forth. Hence, when need arises firms, can go for short- or long-term borrowings, loans, drawn debt and other ways of getting funds through banks or other relevant institutions. The type of need that a firm has determines the type of debt the business will incur, which could be long-term or short-term, as exemplified by both Costa and Adairs. References Adairs Limited. (2015). Prospectus: Initial public offering of ordinary shares. Retrieved from http://www.asx.com.au/asxpdf/20150617/pdf/42z7dxcb3f69w4.pdf Churchill, N.C., & Lewis, V.L. (1983). The five stages of small business growth. Harvard Business Review (May). Retrieved from https://hbr.org/1983/05/the-five-stages-of-small-business-growth Costa Group Holdings Limited. (2015). Prospectus: Initial public offering of ordinary shares. Retrieved from http://www.asx.com.au/asxpdf/20150723/pdf/42zzpkpcflwnkx.pdf Ghosh, A. (2009). Pricing and performance of initial public offerings in the United States. New Brunswick, NJ: Transaction Publishers. Resch, M. (2011). Strategic project management transformation: Delivering maximum ROI & sustainable business value. Fort Lauderdale, FL.: J. Ross Publishing. Read More