Business Law and Practice notes - BPP Law School - High Distinction Level notes!
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These can be acquired – we focus on Limited companies
Listed companies = ‘a takeover’ (not an acquisition)
The business/ company being purchased = Target
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Valuing a company -
It is necessary to estimate the value of the company before the costs and benefits can be assessed.
If the company listed company - the share price will be quoted on a stock exchange and hence, possible
to place a market value on the company.
However, if company is not doing very well and the share price is depressed, the market value
may not represent what someone else is prepared to pay for it.
Other companies may feel that if the company was better managed they would be able to make
more profit and then increase the return and hence value of the company. In addition, we have
to answer the same question concerning value even if the company is not quoted and therefore
there is no quoted share price available.
So how much would the potential buyer be prepared to pay for the company?
Book value -
This is on the balance sheet – the value of the assets
Although this may not be the true value of the assets
Another method is to value all the assets at the break- up value, i.e. how much would be left if all the
assets were sold and the liabilities paid.
‘Going concern’
The book value or breakup value is often not a true reflection, as it will probably be worth more as a
going concern (i.e. as a money generating business)
This depends on how well the company is performing and the future prospects for the
company’s products and services.
, Future cash flows-
Buying a company = an investment
So we can say that the purchaser is actually buying a future stream of income that is generated
by the profits of the company, or future cash flows.
So to value a company this way =
take a number of years’ multiple of the future profits.
If we made a bold assumption that the profits are equivalent to cash flows we can calculate the
present value of a number of years’ future cash flows. This can be equated to the return that the
investor will receive from the investment over a period of time, leaving aside any increase in the
value of the company when it is sold. (Note that when you study the Business Accounts
Workbook you will learn that profit does not always equal cash flow).
There is no best way to accurately value a company, as there is always an element of subjective
judgment, e.g. how many years are taken into account and what return is expected.
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How do you acquiring the business of a company limited by shares?-
The company is owned by the shareholders – so it can be done in 3 ways:
Acquiring all the shares in the company – A share sale
Acquiring the business of the company as a going concern or by acquiring a particular part of the
business of the company as a going concern (e.g. a trading division) - an asset sale / business
sale
o We focus on this
Purchasing the particular assets that you require - a sale of assets
The sale of target may be conducted via an auction process, whereby a number of potential buyers are
invited to submit bids for target.
This Chapter focuses on private treaty (or bilateral sales) i.e. sales involving one buyer and one
seller)
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Share sales-
A buyer purchasing the issued share capital of a company.
Can purchase only some of the issued shares.
o Following the purchase, the company will not be wholly-owned and particular issues
may arise in the running of the company.
It is more common for all of the issued shares to be purchased, so that the target company will
be wholly-owned following the purchase.
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