Harvest Strategy & Liquidation Strategy
‘Harvest’ or ‘asset reduction’ strategy is a strategy whereby the firm reduces its assets to minimum, even sacrificing the future profits for the purpose of generating enough hand cash. It is already stated that a firm has to choose between liquidity and profitability. It is because a reduction in one will lead to increase in another.
That is higher the degree of liquidity, lower will be the degree of profitability. The harvest strategy calls for systematic step by step disinvestment in a business unit to utilise best the cash-flows as the company exits from an industry.
At the starting stage, the management eliminates the new investment, cuts back research and development expenditure, reducers maintenance expenditure while encashing the benefits of past goodwill.
As the firm loses its market share, the firm tries to increase its short-run cash-flows by adopting a harvest strategy. The cash generated through harvest strategy is reinvested elsewhere in the firm. Once the cash-flows begin to decline, the firm goes in for liquidation strategy.
The liquidation strategy is to sell off or close down the firm to avoid bankruptcy and fairly better deal for shareholders than running the risk of making the firm to suffer from losses. Thus, the liquidation strategy is the extreme step where the firm deliberates shuts of the business and gets the money to safeguard the interests of stake-holders.
Why and when to go in for liquidation strategy?
The reasons and circumstances created for liquidation strategy are both economic and non-economic. That is rational and emotional. If one wants to go by economic guidelines, the business should be sold when its present value (liquidation value) is more than the discounted present value of its future flow of income. In case of emotional reasons, it is the perceived value that has its relevance.
These reasons and the circumstances are:
When the future of business is not bright:
A company may have at present at its zenith point of performance with no definite future, it is worthwhile to close it for its future possible development. There is no point in crying over spilt milk. Before the milk is spoilt, the firm can use it for other purposes. The situation is such that something is better than nothing it is because today is better than tomorrow as there signs of fast decay. The spread of gangrene should be stopped by losing a part of body that stops further decay.
The firm has accumulated losses with no come back:
Due to bad financial policies, the firm gets into the Pandora box which has no point of return. The firm goes on increasing losses with every extra step it takes. There are no hopes of coming out this rut of stagnation. In case some other firms have offered to take up such a firm which is caught in the hot pangs of losses, it is worth to take advantage. The companies get tax concessions when a good business house takes over suffering company at pretty good prices. This is for the mutual benefit that this deal works a golden opportunity.
When the retaining value is less than sale value:
Business is a game of ups and downs where both good and bad times are ahead. A firm might be in shambles because of mismanagement so much so that it is beyond the capacity of present management to regain the good old past. In such case, it pays to sell it off than navigating the ship which has broken hull and bottom cracked.
Better business offers:
In a bid to diversify the existing business a good business house may come forward to acquire another business at a pretty high price than its net worth. There will be no such occasions for which it will lose its grip.
Once a firm decides to sell its business, the management should try to get better value for its assets, management, products-both tangibles and intangibles. It should be a sound closer for both the buying and selling firms.
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