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Assess whether Innocent Drinks Ltd should have raised finance by selling a minority of its shares to its 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 its 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 its shareholders, such as Coca-Cola. - Edexcel - A-Level Business - Question 2 - 2017 - Paper 2
Step 1
Knowledge of the private limited company structure
Answer
Innocent Drinks Ltd is classified as a private limited company, meaning it is owned by shareholders who actively contribute to running the business. Shares cannot be publicly traded or sold without agreement from other shareholders.
Step 2
Reasons for selling shares
Answer
- Financial Support: Selling shares to Coca-Cola could provide necessary finance and expertise, aiding Innocent's expansion into new markets.
- Distribution Network: Coca-Cola's established distribution channels might enhance Innocent's product reach.
- Maintaining Control: Richard Reed and the Innocent Drinks owners would retain significant control despite selling a minority stake.
Step 3
Reasons against selling shares
Answer
- Loss of Independence: Collaborating with Coca-Cola could lead to a loss of autonomy in business decisions.
- Profit Sharing: Coca-Cola would expect profit shares, reducing funds available for reinvestment into the business.
- Reputational Risks: Partnering with Coca-Cola might damage Innocent’s brand image, alienating existing customers who value its original ethos.
Step 4
Potential Judgment
Answer
Considering the pros and cons, Innocent Drinks should have sold shares to leverage Coca-Cola's resources, which would facilitate expansion. However, the long-term risks associated with losing control and potential brand damage make this a complex decision, ultimately highlighting the risks of such a venture.