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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 a minority of its shares to Coca-Cola for several reasons. First, Coca-Cola could provide valuable advice and financial support. Given that the owners of Innocent Drinks may lack extensive business experience, the expertise of Coca-Cola could enhance their operations and profitability.
Additionally, Coca-Cola's well-established distribution network could give Innocent Drinks access to new markets, potentially increasing their sales. By selling shares, Innocent Drinks could also secure necessary funding for expansion without taking on debt.
Step 2
Reasons against selling shares
Answer
However, there are significant reasons against this course of action. Selling shares to Coca-Cola might lead to conflicts in decision-making, whereby Coca-Cola would likely seek to influence company strategy for its benefit. This could create tension between the original owners and their new investor. Furthermore, by involving Coca-Cola, Innocent Drinks might have to share a portion of profits as dividends, which could limit funds available for reinvestment in new products or machinery.
Moreover, there is a potential risk to the brand's image. Some customers may perceive the partnership as a compromise to Innocent Drinks' independence and integrity, potentially alienating a segment of their customer base.
Step 3
Judgment
Answer
Taking into account the potential benefits and drawbacks of selling shares, Innocent Drinks Ltd may have made a significant mistake by proceeding with this option. On one hand, the financial and operational support that could have been secured might outweigh the risks. On the other hand, the eventual loss of control and independence when Coca-Cola became the majority shareholder fundamentally changed the company's dynamics and could have negative repercussions on its brand value. In conclusion, while selling shares might have offered immediate advantages, the long-term implications suggest it was not the prudent choice.