Schooner Yachts is a closely held company that was founded in 1970 by Russ Break

Question

Schooner Yachts is a closely held company that was founded in 1970 by
Russ Breaker to build a top-quality line of sailboats. The company’s debt ratio is 48 percent,
compared to an average ratio of 36 percent for sailboat companies in general. The stock is
owned in equal parts by ten individuals, none of whom is in a position to put additional
funds into the business. Sales for the most recent year were $12 million, and earnings after
taxes amounted to $720,000. Total assets, as of the latest balance sheet, were $9.6 million.
Schooner Yachts needs an additional $4 million to finance expansion during the current fiscal
year. Given the worldwide growth in leisure-time activities and interest in sailing in particular,
the firm can anticipate additional outside capital needs in the years ahead.

Should the company use private placement of debt, public offering of debt or ordinary shares public offering to raise additional funds? Explain your answer.

*I asked this question before, but I dont understand. The company is closely held, is it okay to go for ordinary shares public offering?

Explanation / Answer

The consideration of maintaining control may be significant in case of closely held and small companies. A shareholder or a group of shareholders can purchase all or most of the new shares of a small or closely held company and control it. Even if the owner-managers hold the majority shares, their freedom to manage the company will be curtailed when they go for initial public offerings(IPOs). Fear of sharing control and being interfered by others often delays the decision of the closely held companies to go public. To avoid the risk of loss of control, small companies may slow their rate of growth or issue preference shares or raise debt capital. If the closely held companies can ensure a wide distribto avution of shares, they need not worry about the loss of control so much.

The holders of debt do not have voting rights. Therefore it is suggested that a company should use debt to avoid the loss of control. However, when a company uses a large amount of debt, a lot of restrictions are put by the debt-holders. A very excessive amount of debt can also cause serious liquidity problem and ultimately render the company sick, which means a complete loss of control.

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