George Zegoyan and Amir Gupta face a difficult decision. Their private auto parts manufacturing company has been

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Question:

George Zegoyan and Amir Gupta face a difficult decision. Their private auto parts manufacturing company has been a great success - too quickly. They cannot keep up with the demand for their product. They must expand their facilities, but have not had time to accumulate sufficient working capital, nor do they want to acquire long-term debt to finance the expansion. Discussions with their accountants, lawyers, and stockbrokers have confronted them with the necessity of going public to raise the required capital.

Zegoyan and Gupta are concerned about maintaining control if they become a public company. They are also worried about loss of privacy because of the required reporting to various regulatory bodies and their shareholders. Naturally, they are also pleased that the process will enable them to sell some of their shareholdings to the public and realize a fair profit from their past and expected future successes. They will be able to sell 40 percent of the shares for $500,000, which is ten times their total investment in the company. It will also allow them to raise substantial new capital to meet the needs of their current expansion program.

The proposed new structure will allow them to retain 60 percent of the outstanding voting shares, so they will keep control of the company. Nevertheless, they are somewhat uneasy about taking this step, because it will change the nature of the company and the informal method of operating they are used to. They are concerned about having "partners" in their operations and profits. They are wondering whether they should remain as they are and try to grow more slowly, even if it means giving up profitable orders.

DISCUSSION QUESTIONS

Do they have any other options besides going public? Is the franchise route a viable option? Explain.
Do you think they should try to limit their growth to a manageable size to avoid going public, even if it means forgoing profits now? Why?
Would you advise them to sell their business now if they can get a good price and then start a new operation? Explain.