All entries for Tuesday 23 March 2010

March 23, 2010

ENVC Exercise 6

Question: Your Great Uncle died and left you a company that you have neither the time nor inclination to run –hence you want to sell. Set out the options for which type of buyer might be interested and the differences in likely value that they might place on the business. Conclude by deciding which buyer you hope will buy it and describe why.

My starting point would be to get an overview of the assets and check the financial statement of my late uncle's firm. It will give me an overview of the state of affairs and the economical conditions the firm is at present. My intention with the company is to sell it off since I do not have time nor interest in running this company.

I would start with the looking for options and interested parties that would like to invest in buying my late uncle's firm. It this regard there may be several options that I will describe in more detail below.

I would respect my uncle's wish to keep the company intact and will not sell it off in pieces. I will also look for options that will maintain the welfare and balance for the employees that are working for the firm. At the same time there will be my personal interest in harvesting the best best possible price for the company.

I could opt for partial harvest retaining some of the control and selling part of the business to an interested party. Same goes for private placement where I would keep a certain percentage and interest in business.

Ideally, strategic sale would be my most preferred option since it would be a complete business transaction where I get the value for selling the company and the new buyers protects and develops the firm that they are buying from me. In this sense, most of the employees remain protected thus making less tubulence internally. Another option would be financial sale which is acquistion by individual investor meaning that an individual buyer is taking over company. ESOP (Employee Stock Ownership Plan) is another good solution for selling the company, this time to employees themselves through the stock option plans. This will increasingly transfer the ownership to the employees themselves making them more loyal and motivated to achieve good results for the company. At the same time I would not like to stay behind with too many stocks since this will require that I involve my self to a greater extent in the company's state of affairs. Mergers and Acquisitions (M&A) may also be an interesting option that will give me financial benefits while utilising the company's potential in synergy with another firm.  

Management Buy Out (MBO) may be another preferred option where the management buys the company out on the basis of company's future potential for earnings. For me this would be a good option although since 1980-ies and after DOT.COM bubble bursts it may prove difficult to such initiatives to get financing for such undertakings. Management Buy In (MBI) would be very much the same as MBO except that the management team is external to the company. Both options may be of interest since such acquisitions are motivated by the belief that the company has future potential and that there is a real value that can be further explored, which will ultimately secure me a good selling price. 

Some less preferred options would be siphoning cash where taking money out of the business would impact its operating cash flow and may be damaging the company's ability to invest in R&D and expansion, which would ultimately decrease its market value although I would make some initial financial gains. Transfer of Ownership to another family member that is willing and hopefully able to take over the running of company. This option may and may not be successful depending on the ability, charisma and internal power politics and rivalry between family members. Initial Public Offering (IPO) is also not a very feasible option since these are mostly for big companies wiith good account records and they generally take too long and are not suitable for this type of family owned businesses.

Extracting most of the financial worth of the company will be the ultimate incentive for me. That would be the ultimate why as a reason for selling the company. At the same time I would try to keep the company in one piece and try to protect the employees as far as possible. Selling price would be dependent on many factors such as the industry, technology, company's economy and expansion possibilities, prospect for future earnings and profit.  

Reviewing the options and the potential I would primarily go for strategic or financial sale with ESOP, MBI or MBO as potential good second options.

March 2010

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