Harvest Time: Stakeholder Preferences
Business owners and managers are responsible for making tough decisions involving the enterprise. One of these decisions can be whether to continue operating or to close down the company. This can be done by reviewing the sustainability of their business activities. While making these decisions, all the stakeholder interests must be respected. Stakeholders are individuals who are directly or indirectly affected by the business decisions and operations. They may include, customers, managers, employees, shareholders, suppliers, the government and the general public. An existing business can be brought to an end in many ways such as mergers and acquisitions, ESOP’s, terminations and transfers, and IPO’s. This essay aims to evaluate and explain why different stakeholders may advocate for mergers, ESOP’s terminations and transfers or IPO’s as ways of ending the business.
To start with, a merger refers to an agreement between two enterprises to come together and establish one new company. Mergers and acquisitions can be done to enable the company to expand into new market segments or to gain a larger market share. The shareholders may prefer a merger as a way of ending the business as the stock prices of the newly established enterprise may be higher as compared to those of both the target and the acquiring firms (Monni, Novelli, Pera, & Realini, 2017). This is usually profitable for the target company’s shareholders who may benefit from the stock price arbitrage caused by the merger. Also, in cases where the business is not well-managed by the existing managers, the employees may prefer a merger with expectations for better management and opportunities for promotion in future.An ESOP may also act as a better exit strategy for a business owner. An ESOP is a form of tax-qualified retirement plan that is similar to a profit distribution-plan. An ESOP must invest in the common stock of shares of an entity that is closely linked to the employer (Monni, Novelli, Pera, & Realini, 2017). Business owners may prefer ESOPS because of the tax and non-tax benefits accrued. For example, shareholders of a C corporation who sells at least 30% of their common stock to an ESOP are able to defer taxes on their capital gains from their stock sales. For the S Corporations, the percentage of stock ownership held by ESOP is exempt from federal income taxes. Employees may also appreciate ESOPS, especially in cases whereby the owners are interested in rewarding them for making significant contributions to the firm. Besides, ESOPs may enable the owners to avoid third-party acquisitions which may result in the relocation of the business or changes of the existing business structure.
Truly, an initial public offering can be preferred by both the managers and shareholders as an exit strategy. An IPO is a process by which a firm publicly trades its stock for the first time (Bayar & Chemmanur, 2013). IPOS are preferred by managers as they enable them to gain access to the international capital markets as additional sources of capital. Besides, it may lead to improved liquidity for the existing shareholders and the employees who may have acquired the company’s shares as a section of their compensation plans.
Finally, a business may opt to terminate or transfer its activities. Transfers are mostly preferred by business partners, especially, when one partner needs to leave the company, while the other partner desires to remain (Monni, Novelli, Pera, & Realini, 2017). On the other hand, termination entails bringing the business to a halt and paying all the creditors their dues. A creditor with preferential rights may prefer termination whenever the business is unable to pay its debts. This will enable the creditor’s debt to be settled by the proceeds from the sale of the company’s assets.
In conclusion, IPOs, ESOPs, terminations, and transfers are some available exit options for a business. However different stakeholders may prefer different options with regards to the benefits that they may earn from such options.
Bayar, O., & Chemmanur, T. J. (2013). POs or Acquisitions? A Theory of the Choice of Exit Strategy by Entrepreneurs and Venture Capitalists. 1-35.
Monni, S., Novelli, G., Pera, L., & Realini, A. (2017). Workers’ buyout: the Italian experience, 1986-2016. Entrepreneurship and Sustainability Issues, 4(4), 526-539.