Question
In: Accounting
Assume you own an Industrial Company, do you think is it a good time to tell...
Assume you own an Industrial Company, do you think is it a good time to tell your company today during the coronavirus? Do you think it will be valued correctly? Under which circumstances would you sell and which one's you wouldn't sell?
Solutions
Expert Solution
At this point of time the valuation of company won't happen correctly.
The valuation is done on the basis of future cash flows. And the cash flows have been severely impacted because of coronvairus. The future cash flows projection will also not happen correctly. Hence, in current situation company should not be sold.
However, if the company is facing issues even to run that is it is not having funds to manage its day to day operations then only the company should be sold. Valuations of company are based in lots of parameters.
The funds and sales and profits being few of them. The sales have been heavily hit because of the current situation. Because of lockdown the factories are totally shut and hence sales have gone down to zero. Similarly, the profits have gone down to zero infact negative. The salaries and interest and fixed expenses are all being incurred. These expense have impacted the balance sheet and it is showing losses.
This all causes the buyer to value the company lower than what it should be valued at. Hence, this will cause lower funds to be received by promoters or sellers of the company.
The company should be sold when the buyer is ready to give more then what the company is worth according to seller. This happens when the buyer sees the future prospects in the company. Also, if the company is not being able to fun due to funds or any other reason then only company should be sold.
The company should not be sold in such disasters because the valuation is impacted and overall economy being in turmoil investors are not that ready.
In ordinary market situation, not only proper price is fetched but a large number of buyers are also available. This gives a sense of competition and better price and valuation can be fetched.
These are circumstances where company can be sold and cannot be sold.
As of now, in current market scenario the Company should not be sold.
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