The reasons to sell a company - ANQUOR Corporate Finance

If there are companies that buy, it is obvious that there are companies that sell. But the reasons for selling are different from the reasons for buying:

  • Added value.The first reason for sale comes when an entrepreneur has created a good business, with significant sales volume and good margins, and receives an offer from a larger company that is consolidating. If the offer is good, that is, if it has a correct assessment according to the methods that we have presented in the previous chapter, and the entrepreneur is not clear about a future plan or has achieved a level of business complexity that will be difficult for him to overcome alone, selling is a good option.
  • Lack of business continuity.Many family businesses pass from parents to children, from generation to generation. At times it may happen that the next generation is not interested in continuing the company or simply do not have a next generation. This is another good opportunity to sell the company and to do so at a time when it is of high value. When an entrepreneur is in this situation, despite how difficult it can be to consider selling what has been the work of a lifetime, he must act with a cool head and prepare the company to obtain the maximum value. Having clear financial and valuation concepts is very important in these circumstances.
  • Strategic reorganization of the business.There may be a situation in which a company has successfully diversified its business but realizes that some of the company’s divisions have evolved in such a way that integration with the others becomes difficult, so this division must leave . It is a common situation in large industrial conglomerates and multinational companies. Divestment due to business reorganization is a good reason for the sale, whatever the size of the company.
  • Risk reduction.Small companies, and to a lesser extent medium-sized companies, that have achieved a good market position with a specific product or in a certain geographical area, but who see that their position is weak if they do not diversify into other products and markets and do not see themselves strength to do so, they may decide to join a large group in order to consolidate their technical capabilities and realize the accumulated value.
  • Economic and financial difficulties.Finally, the case of companies that are in financial difficulties, which cannot resolve on their own, and are forced to consider the possibility of a sale, must also be considered. This is undoubtedly the worst situation to sell, since the negotiating capacity is very low.

Purchase or merger

The question that opens this chapter says: could I buy from my main competitor? The answer is that there should be very concrete and specific circumstances that make this fact unlikely. Our main competitor will be a company of a similar size to ours, so it would be a purchase that our balance sheet would hardly support without a capital contribution. But the right circumstances could arise if our competitor had:

– Similar sales and much lower margins.

– A balance sheet with a lot of debt, the result of wrong investment decisions that call into question its repayment capacity.

– Lack of succession in the business.

Therefore, just as we look at our competitors’ products, we can also look at their financial situation. Financial information is mandatory and publicly accessible through the Commercial Registry. All companies deposit the annual accounts every year, and they are available to everyone.

Consider the possibility of buying from our competitor is a healthy exercise that requires us to:

– Compare our financial accounts following the analyzes we have presented and drawing the appropriate conclusions for the management of our company.

– Valuing our business and monitoring the evolution of its value annually.

– Assess the business of our competitor using the same model and comparing its evolution, with which we can check the economic and financial strength of our business compared to the companies in our sector and take the opportunity to make the most appropriate financial policy decisions.

Although unlikely, the purchase opportunity may exist. And if not, we can contemplate the opportunity of a merger. A merger is an operation similar to buying and selling but does not consume cash. Two companies that decide to merge their businesses their separate businesses into one, thus optimizing the structural costs and seeking new synergies of products, markets and industrial plants to be much more competitive.

A merger involves valuing the companies participating in the operation and determining what is technically called the exchange equation. Let’s imagine two companies that want to merge and that are valued at 100 and 50 respectively. The equation of change would be 2 to 1, that is, if the company created from the merger of the two businesses has 100 shares, the shareholders of the first company would receive 66.6 shares, 2/3 of the total, and the of the second they would receive 33.3 shares, 1/3, thus maintaining the ratio of 2 to 1.

A merger can also be done by absorption. That is, in the previous case, the largest company could absorb the smallest, making an issue of 50 new shares that would be purchased by the partners of the second company and that would be paid with the contribution of the company’s current shares. absorbed.

The decision on the structure of a merger has strong mercantile and fiscal implications that are solely for the financial

The reasons to sell a company

If there are companies that buy, it is obvious that there are companies that sell. But the reasons for selling are different from the reasons for buying:

  • Added value.The first reason for sale comes when an entrepreneur has created a good business, with significant sales volume and good margins, and receives an offer from a larger company that is consolidating. If the offer is good, that is, if it has a correct assessment according to the methods that we have presented in the previous chapter, and the entrepreneur is not clear about a future plan or has achieved a level of business complexity that will be difficult for him to overcome alone, selling is a good option.
  • Lack of business continuity.Many family businesses pass from parents to children, from generation to generation. At times it may happen that the next generation is not interested in continuing the company or simply do not have a next generation. This is another good opportunity to sell the company and to do so at a time when it is of high value. When an entrepreneur is in this situation, despite how difficult it can be to consider selling what has been the work of a lifetime, he must act with a cool head and prepare the company to obtain the maximum value. Having clear financial and valuation concepts is very important in these circumstances.
  • Strategic reorganization of the business.There may be a situation in which a company has successfully diversified its business but realizes that some of the company’s divisions have evolved in such a way that integration with the others becomes difficult, so this division must leave . It is a common situation in large industrial conglomerates and multinational companies. Divestment due to business reorganization is a good reason for the sale, whatever the size of the company.
  • Risk reduction.Small companies, and to a lesser extent medium-sized companies, that have achieved a good market position with a specific product or in a certain geographical area, but who see that their position is weak if they do not diversify into other products and markets and do not see themselves strength to do so, they may decide to join a large group in order to consolidate their technical capabilities and realize the accumulated value.
  • Economic and financial difficulties.Finally, the case of companies that are in financial difficulties, which cannot resolve on their own, and are forced to consider the possibility of a sale, must also be considered. This is undoubtedly the worst situation to sell, since the negotiating capacity is very low.

Purchase or merger

The question that opens this chapter says: could I buy from my main competitor? The answer is that there should be very concrete and specific circumstances that make this fact unlikely. Our main competitor will be a company of a similar size to ours, so it would be a purchase that our balance sheet would hardly support without a capital contribution. But the right circumstances could arise if our competitor had:

– Similar sales and much lower margins.

– A balance sheet with a lot of debt, the result of wrong investment decisions that call into question its repayment capacity.

– Lack of succession in the business.

Therefore, just as we look at our competitors’ products, we can also look at their financial situation. Financial information is mandatory and publicly accessible through the Commercial Registry. All companies deposit the annual accounts every year, and they are available to everyone.

Consider the possibility of buying from our competitor is a healthy exercise that requires us to:

– Compare our financial accounts following the analyzes we have presented and drawing the appropriate conclusions for the management of our company.

– Valuing our business and monitoring the evolution of its value annually.

– Assess the business of our competitor using the same model and comparing its evolution, with which we can check the economic and financial strength of our business compared to the companies in our sector and take the opportunity to make the most appropriate financial policy decisions.

Although unlikely, the purchase opportunity may exist. And if not, we can contemplate the opportunity of a merger. A merger is an operation similar to buying and selling but does not consume cash. Two companies that decide to merge their businesses their separate businesses into one, thus optimizing the structural costs and seeking new synergies of products, markets and industrial plants to be much more competitive.

A merger involves valuing the companies participating in the operation and determining what is technically called the exchange equation. Let’s imagine two companies that want to merge and that are valued at 100 and 50 respectively. The equation of change would be 2 to 1, that is, if the company created from the merger of the two businesses has 100 shares, the shareholders of the first company would receive 66.6 shares, 2/3 of the total, and the of the second they would receive 33.3 shares, 1/3, thus maintaining the ratio of 2 to 1.

A merger can also be done by absorption. That is, in the previous case, the largest company could absorb the smallest, making an issue of 50 new shares that would be purchased by the partners of the second company and that would be paid with the contribution of the company’s current shares. absorbed.

The decision on the structure of a merger has strong mercantile and fiscal implications that are solely for the financial

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