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Assess whether Innocent Drinks Ltd should have raised finance by selling a minority of its shares to shareholders, such as Coca-Cola. - Edexcel - A-Level Business - Question 2 - 2017 - Paper 2
Question 2
Assess whether Innocent Drinks Ltd should have raised finance by selling a minority of its shares to shareholders, such as Coca-Cola.
Worked Solution & Example Answer:Assess whether Innocent Drinks Ltd should have raised finance by selling a minority of its shares to shareholders, such as Coca-Cola. - Edexcel - A-Level Business - Question 2 - 2017 - Paper 2
Step 1
Reasons for selling shares
Answer
Innocent Drinks Ltd could consider selling shares to Coca-Cola for several advantageous reasons. Firstly, Coca-Cola is a well-established company that could provide not just financial support but also valuable expertise in distribution and marketing. This partnership might help Innocent Drinks expand into new markets and significantly enhance its business growth. Secondly, the cash injection of £30 million could be utilized to invest in new production capabilities, which may improve efficiency and output. Moreover, retaining a minority share would allow the founders, Richard Reed and others, to maintain some control over strategic decisions.
Step 2
Reasons against selling shares
Answer
On the other hand, there are compelling arguments against selling shares to Coca-Cola. This partnership may lead to potential conflicts in decision-making, particularly concerning the future direction of Innocent Drinks. Coca-Cola, as a majority shareholder, would likely expect a significant say in business operations, which could dilute the original founders' vision. Additionally, by sharing profits with Coca-Cola through dividends, Innocent Drinks might limit its reinvestment capacity for future growth. There are also reputational risks to consider; an association with Coca-Cola could alienate existing customers who value Innocent Drinks' independence and wholesome image.
Step 3
Potential judgment
Answer
In conclusion, while selling shares to Coca-Cola could provide immediate financial benefits and growth opportunities, reading between the lines suggests that it could ultimately jeopardize Innocent Drinks' control and brand identity. Therefore, Innocent Drinks should have proceeded with caution, ensuring that any deal would not compromise their original mission or independence.