A Brief Look at Tax Changes Throughout US History

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Benjamin franklin said it “In this world, nothing can be said to be certain, except death and taxes”. And he was totally right. Taxes have been in our lives forever, since we can remember our grandparents paid taxes, our parents paid taxes and we ended up paying taxes as well. We also know that these taxes tend to change, not to be cheaper or softer, and tend to regulate almost any activity in our day to day lives.

But how has taxation changed in the United States? More importantly, what are those changes that have marked the history of the tax system in the Unites States? Surprisingly, at the beginning, America was tax-free for much of its early history. At least, it was free of direct taxation like income tax. We have to remember that it was taxation that led to the revolution against the British in 1773 and after that, one of the first challenges the new system faced was the Whiskey Rebellion. This rebellion was all about groups of Pennsylvanian farmers angry about the tax on whiskey burning down tax collectors' houses and tarring and feathering any collectors too slow to get away. It is well remembered because the congress handled the situation using military force because they had the right to collect indirect taxes for the nation.

Since this date, taxation has had many changes, some good and necessary, others not so favourable for some people and at times unfair. Let’s take a look at those moments in taxation history that are worthy to remember and that gave an amazing boost to the North American economy.

Near the previous date, in 1790, taxation had a big addition to its variety. A war with France led the government to impose a property tax and a further modification to it in 1812 with the first income tax approach after a civil war. Of course the consequences of the war, specially a war against oneself as a civil war is, are totally negative. The American Civil War was very expensive for the nation because there was an amazing rate of debt that had to be acquired in order to carry out such war. In order to help pay for the war, the Congress passed the Revenue Act of 1861 which taxed incomes exceeding $800, and was not rescinded until 1872. Many scholars consider that it was this act that created most of what it is considered as the modern tax system. That same year the U.S. Internal Revenue Service (IRS) was founded as a consequence of arranging such taxes and making the government machinery work perfectly.

In 1895 there was a big game changer.  Although the Constitution forbade any direct taxes that were not levied in proportion to each state's population, the Supreme Court declared a flat tax contained in the 1894 Wilson-Gorman Tariff Act unconstitutional. This was a huge victory for all the taxpayers because now it was a bit fairer the way they were going to be charged for their taxes. This started a feeling in people´s hearts that taxes could also bring negative consequences to world trade and for underprivileged people. After this, the 16th Amendment was introduced in 1913 and that gave way to one type of income tax for the population and a further income tax for people with an annual income of over $3,000. This tax touched less than 1% of Americans and gave the government the possibility to control high incomes that came from anonymous societies or big partnerships and that were free from being charged as a group. (This was one of the mechanisms used to get to Al Capone´s finances and money movements)  

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For the Second World War and for his new approach to the country called The New Deal, Roosevelt introduced many taxes and increased many others. For Roosevelt´s New Deal there was a huge deficit that had to be covered by imposing and collecting more taxes. By the end of 1936 there was a top tax rate 76% and the economy couldn’t take it. Taxes were then raised several more times and only the corporate tax changed for good lowering its tariff. The war came and America needed money to support their allies so a more aggressive taxation was imposed. By 1945, 43 million Americans paid tax and the amount of taxes collected went from $9 billion in 1941 to $45 billion in 1945.

All these changes in taxation in the United States came after big issues in the government or society or after wars in and outside of the country. We all know that taxes are totally necessary, but we also known that those same taxes make our lives a little bit more difficult. Learn more about taxation in this article

What is Brexit and How Will it Affect Taxes?

One of the most important events that have happened these days is the so called Brexit (or British Exit), a term used to refer to the United Kingdom leaving the European Union. This Event has had a lot of consequences in both national and international aspects and has affected greatly the finances of the country. These consequences can be seen in the drop in both the price of the Pound and British shares, this has led to different reactions in international finances, for example the rise of the American dollar just days after the decision.

Most think that this was a bad decision and will have bad consequences for the United Kingdom, and these problems have started to appear through the country. One of the biggest consequences people think the United Kingdom will face is the fact that the intervention of the European Union helped keeping the United Kingdom, well, united. Brexit has made the tension between the countries that make part the United Kingdom clearer, especially from the side of Scotland as most of them didn’t want Brexit to happen. Scotland has also been historically against British control and Brexit seems like it will strengthen the Scottish separatist groups even more and this might just push Scotland enough to leave the United Kingdom. Ireland on the other hand, depended a lot of the European Union help reduce tension in the borders, also most of Ireland supported to Remain in the European Union.

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As we said before, most consequences of the decision will be economical and one of the things that will be affected both directly and indirectly is taxes. Taxes will face changes from both Brexit directly and from other economic aspects that are also affected by it. Before we go into taxes directly, we have to take into account that many things may vary depending on how the government of the UK decides to manage their relationship with the European Union and what models they choose to follow. The three models that are the most likely to be chosen, are the Norwegian model, the Swiss model and the Canadian model. The Norwegian model means the UK will make part of the European Free Trade Association and will be a party of the European Economic Area Agreement, meaning its economic relationship would be regulated by the European Union. In the Swiss Model, the UK would make part of the European Free Trade Association but it would not be a party of the European Economic Area Agreement, this would make trade between both to be regulated via an agreement between both sides, though this seems to be the less viable model. The final model is the Canadian model, this model makes use of the World Trade Organization to regulate and supervise the relationship between the countries and the European Union, and would depend on other groups and alliances to help regulate the commerce. Some of these alliances include the OECD, G20 and the one mentioned before, the WTO. After they choose one of these models, the consequences will be easier to predict as more information will be available.

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First we will analyze what taxes will be affected indirectly be Brexit. The first one will be VAT, VAT is chargeable in most products and services provided within the European Union but each member chooses how it works for them, including methods of collection and rates. This will mean the UK will have to analyze and modify it so it can be viable for them when they are not part of the EU. The UK leaving the EU means the UK will have total power over their taxes and might even overhaul the whole system, but this will also mean they would have to pay additional taxes when making commerce with the EU. The UK will not be able to make use of some of the economic advantages of the EU, like the proposed US-EU Transatlantic Trade and Investment Partnership that will remove some custom duties and other trade barriers.

Finally the taxes that will be affected directly are mostly those related with company profits and capital gains, as the UK will have no obligation to follow the EU laws designed to reduce the burden of direct taxation for companies. These laws are designed to avoid double taxation when working within the single market. Even before the Brexit, the UK was not really fond of the models of corporate taxation proposed be the EU, so this will represent a benefit for the UK as they will have control of it.

So we will have to wait a little before we see the full consequences of the British Exit and according to how the issue develops we will have varied results. If you like related topics and are interested in the world of taxes and finances you should check more content in this blog by Adam Greene, the recommended post is What you need to know about corporate taxation as it is about a related topic.

Economic Policy of the Hugo Chávez Government

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From his election in 1998 until his death in March 2013, the administration of the late Venezuelan president, Hugo Chávez, proposed and enacted poor planned socialistic economic policies. In the early 2000s when oil prices soared and offered Chavez funds not seen since the beginning of Venezuela's economic collapse in the 1980s, Chávez's government became "semi-authoritarian and hyper-populist" and consolidated its power over the economy in order to gain control of large amounts of resources. Domestically, Chavez used such oil funds for populist policies, like redistribution of wealth, land reform, and democratization of economic activity via workplace self-management and creation of worker-owned cooperatives. Internationally, the Chávez administration used oil production to increase autonomy from U.S. and European governments and used oil funds to promote economic and political integration with other Latin American nations.

As Chávez began to increase domestic spending to build a loyal political following, high inflation, currency controls, an unfriendly environment with private businesses and the risk of default prevented the entrance of stronger foreign currencies into Venezuela. The Chávez government then turned to China to fund its overspending on social programs. Despite warnings near the beginning of Chávez's tenure in the early 2000s, Chávez's government continuously overspent in social spending and did not save enough money for any future economic turmoil, which Venezuela faced shortly before and after his death. As a result of Chávez's overspending and policies such as price controls, there were shortages in Venezuela and the inflation rate grew to one of the highest in the world. Chávez instituted several new taxes on non-priority and luxury goods, aiming to shift the nation's tax burden from the poor to the wealthy, and to control inflation. In 2012, Venezuela's taxes were ranked 188th out of 189 countries due to the high number of payments per year and a 61.7% tax on income per year. From November 2007 until the end of 2007, all bank transactions between businesses had a 1.5% tax extracted, as a means of controlling inflation.

To read more about high taxation, Adam Greene CPA's Blog offers “the Countries with the Highest Taxes in the World”: Link

Follow him on Twitter: adamgreeneny

Venezuela's economy is in a deep crisis

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Nicolas Maduro the president of Venezuela, declared a state of "economic emergency" for 60 days on May 2016. The government stopped publishing any economic data about the country in 2014, other than updates on its shrinking gold and cash reserves. But that changed Friday when Venezuela finally published years of economic data. And it was ugly. Venezuela's economy shrank 7.1% in the third quarter of 2015, according to the government. It's been shrinking for seven consecutive quarters going back to the start of 2014.

Inflation in Venezuela skyrocketed 141% over the year ending in September, the central bank reported. Incredibly, some experts believe even that figure is understating the problem. The IMF projects inflation in Venezuela will increase 204% this year. The country is in economic meltdown due to the worst economic policy in the world. Here are some reasons why Venezuela continues to be an economic mess:

Oil crash hurts Venezuela the most

The economy depends mostly on oil. That was great when a barrel of oil was worth $100 a barrel in 2013 and 2014. Now oil prices have fallen to as low as $28.36, the lowest point in 12 years. As long as oil prices stay historically low, Venezuela will struggle to grow. In this situation the exports will total a mere $27 billion in 2016, down dramatically from $75 billion two years before.

A currency worth less than a penny

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A year ago, one dollar was equal to 175 bolivars. Now a dollar is worth 865 bolivars. Put another way, one bolivar is worth $0.001 less than a penny. Most Venezuelans exchange bolivars and dollars at the unofficial rate because Maduro's regime has created a confusing system that involves three official exchange rates, two for different types of imports and one for ordinary Venezuelans. The two primary rates deeply overvalue the bolivar, creating high demand for dollars.

New power struggle dooms 2016

Some Venezuelans have had enough of Maduro. In January, the opposition party, Democratic Unity, took 109 seats in Congress, far more than the 55 seats Maduro's socialist party won. The opposition now controls 65% of Congress. But the president appointed new Supreme Court justices right before the new Congress took office. They could overturn the opposition's legislation, creating government gridlock. In any case, political instability is never good for an economy and it's on the rise this year.

Default in 2016 is difficult to avoid

Venezuela has been teetering on the brink of default the past two months. The country is barely making enough money on oil exports to cover its debt payments.

This year Venezuela owes over $10 billion in debt payments. Nearly half of that is due in October and November. The only thing preventing a default is if oil prices rise soon or one of its few allies, China, Russia or Iran, bailout the government. But both of those appear unlikely for now.

5 of the Biggest and Most Important Mergers of the Last Decades

The world of corporations and business is one that moves a lot. Companies appear and disappear almost every day, at any time anywhere in the world. It is a dynamic world, so the industries and businesses are dynamic as well and are always looking to improve their status. One of the ways companies and corporations grow is through mergers and acquisitions, (M&A). The idea is to join forces and use the principle of “One plus one equals three” in order to gain advantages like a larger customer base, global footprint, access to distribution channels or suppliers, technical knowhow, and many other things. They don’t always go as expected, but when they do they give the business a competitive edge and enhance shareholder value. Let’s take a look at 5 mergers and acquisitions, that apart from being between 2 big corporations, they were all over the media headlines and were very important for countries, companies and the general public.

Facebook buys Instagram

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In 2012, social network Facebook acquired the mobile photo-sharing service Instagram for the astonishing amount if $1 billion. At the time the company´s CEO Mark Zuckerburg said that it was not likely that they engaged in any other acquisitions of this size and importance. As everybody knows, Instagram is still an independent standalone app separate from Facebook, but with the acquisition, the idea was to improve the service ties between the two companies. The acquisition has been highly criticized because people don’t understand why they needed to spend a billion dollars to do something they probably could have coded in-house for a lot less money and could have gotten the same or even a better result and instantaneous market share.

Apple acquires NeXT

The catch for this business deal is that Steve Jobs used to be part of apple and he was removed from his post. He then founded NEXT and then, with this move, he returned back to apple. This acquisition happened in 1996  and the price was $429 million dollars. Steve Jobs revolutionized the Tech industry and was seen as an icon in Silicon Valley. Everybody knows how the story ends and the success that apple has had in the last 10 to 15 years.

AOL and Time Warner

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This merger is the proper example of what companies shouldn’t do when they engage in this type of deals. This was a total disaster and it is even a case study in academic institutions on what not to do in acquisitions. Time Warner, one of the biggest media and entertainment companies in the world was acquired by America Online Inc (AOL) in 2000 for an amazing $ 182 billion. The merger was registered as the “the biggest mistake in corporate history” by Time Warner Chief Jeff Bewkes. At the same time the dot-com bubble bursted, and resulted in AOL Time Warner reporting a loss of $99 billion in 2002. Their idea was to create the world’s first fully integrated media and Communication Company for the internet century. As we all know, the company did not go that way and the merger failed miserably.

AT&T and Bellsouth.

In 2006 the communication giant AT&T acquired the telephone and communication technology company BellSouth in a deal that went up to $67 billion. The deal resulted in giving AT&T a local customer base of 70 million across 22 states further strengthening its dominance in the industry. Around that time, the company aimed to achieve a combination that would create a more effective and efficient provider in the wireless, broadband, video, voice and data markets. The two companies were already joint owners of Cingular Wireless with 60% ownership with AT&T and 40% with BellSouth and the idea with this merger was to  be more innovative, nimble and efficient, providing benefits to customers by combining the Cingular, BellSouth and AT&T networks into a single fully integrated wireless and wireline Internet Protocol network offering a full range of advanced solutions.

Exxon Mobil merger

This merger was one of the most important mergers in the oil and gas sector. It happened in 1998 and the result was the Exxon Mobil Corporation (XOM), the largest company in the Oil & Gas sector was created. What they did was to bring together the fragments of Standard oil monopoly (Exxon Corporation and Mobil Corporation) in an $80 billion deal. At the time of the deal, Exxon and Mobil had a combined market capitalization of $237.53 billion.

As we can see, mergers can go wrong and can be very successful. It depends on how it is carried out. We wanted to point out some examples of very famous and well known mergers and acquisitions that have happened in the last two decades.

How to Have Considerable Cash Clow for Small Companies

A successful business is not only having the right product or leading the market, there is also a lot going on behind the scenes and a great part of it is having a rigorous recordkeeping practice and a very solid cash flow. A healthy cash flow is not only a sign of a profitable business, but also businesses (especially smaller ones) need to prepare for future events; market changes and meet tax and other obligations. However, history has shown us that the lack of understanding of basic accounting principles have made small businesses fail. So here is a brief introduction on how to keep track of your cash flow. 

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First, let’s define an operating cycle. It is the complete loop through which cash flows, from purchase of inventory through the collection of accounts receivable. It measures the flow of assets into cash and tells you the amount of time you should be able to finance, according to your operating cycle from purchase to receivables. This period of time should be carefully taken into account, especially since capital providers (most likely lenders) require a return on their investment; hence the longer the operating cycle, the more cash you need to minimize the amount to be financed without actually running out of cash.

Another reason for analyzing your cash flow is that it will show whether your daily operations generate enough cash to meet your obligations and if the more cash outflows actually mean major cash inflows from sales. In turn, these movements will determine if your whole operation cycle result in a positive cash flow or in a net drain. To avoid the latter, here are some recommendations to have a healthy cash flow to help make your company profitable, sustainable and, if it’s in your plans, bigger.

1. Plan ahead. Make sure you are aware and have an updated list of your financial requirements such as premises, equipment, staff and working capital. It is always safer to have enough cash at hand to meet next month’s cash obligations. That way you will ensure you can meet such obligations, and an accurate cash flow projection will help you identify and eliminate deficiencies or surpluses in cash and compare figures to those of past months.

2. For most startups and small businesses you will not need certified financial statement, compiled statements, which an accountant prepares with a letter stating that the numbers are based on the information you have provided, will be just fine. Keep frequent financial statements at least on a monthly basis in order to compare your income to that of previous periods. The ultimate objective will be to design a plan to provide a well-balanced cash flow, so when excess cash is revealed it could be that there is excessive borrowing or idle money that could be invested; or if on the contrary cash-flow deficiencies are found, business plans could be implemented to provide more cash.

3. Always keep an eye on key income statement percentages. For example if you are in the manufacturing business, the cost of your goods sold percentage should be more or less the same as the competitor’s.

4. Do not delegate the authority of signing checks or purchase orders. Always keep track of the cash outflow. And never use the money that you have withheld for payroll, sales or for other taxes. This money belongs to the Internal Revenue Service, Social Security Administration and your state’s sales tax authority and you will need it to pay your obligations to them. 

5. Try to collect your receivables as quickly as possible. The longer it takes a firm to collect a customer’s unpaid balance, the more revenues it loses because it is less likely that you will receive full payment. But the faster you collect them, the shorter your operating cycle will be.

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6. Apply stricter credit policies to make more customers pay their purchases in cash to increase your cash on hand and reduce uncorrectable accounts. However, bear in mind that the tighter the credit, the less opportunity for clients to purchase your products or services; so keep an eye on how tight the rope must be to allow some room for adjustments.

7. One of the biggest weaknesses of small businesses is setting the price of their products or services. Pricing is the key element to getting a profit and having a good cash flow; so have a clear and complete knowledge of your product’s market, distribution costs and competition and monitor them frequently to make adjustments when necessary.

8. If necessary, take out short term loans such as revolving credit lines and equity loans to cover your cash flow problems.

9. Not all increase in sales actually means more cash flow. You may have sold on credit, meaning that your accounts receivable would increase but not your cash. It will take up to 30 days or more for receivables to be collected, and in the meanwhile your inventory will have depleted and will need to be replaced, leaving your company’s cash reserves quickly drained. Use a computer to help you track this critical data and give you time to consider those situations and be prepared.

10. And finally watch what you spend and why. Expenses should be carefully analyzed to make sure they are necessary and reasonable. When it comes to accounts payable, if a supplier offers you a discount for early payment, take it; but if there is no discount and you have 30 days to pay do not pay in a week. And whatever you do, always be aware of penalties for late payments and keep your credit record as clean as possible. 

What You Need to Know About Corporate Taxation

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Becoming a company carries a new range of legal commitments and responsibilities.  One of those responsibilities is corporate taxes.  Whether they like it or not companies are affected by them.  The concept might be alarming at first but understanding its generalities and who it affects helps its management. Corporate taxes have been a frequent topic in the news and the headlines of articles and major publications because it is a major concern for big and small businesses.  Let’s talk about a little more about corporate taxation.

Definition

Corporate taxes are levied on the profits a corporation, large or small, generates by all levels of government.  Corporations are legal entities, not individuals or the owners of a company.  As such, corporate taxes can be considered the equivalent of the personal income tax an individual pays. The rates and laws of corporate taxes vary notably across multiple countries, since different governments and nations perceive corporate taxation differently. This is why companies have chosen to have their headquarters in specific places where corporate taxes are way lower.  One example is seen in companies that have moved to the Republic of Ireland (Irish tax rate is only 12.5%) compared with the rate they would have to pay in the U.K. 

Mobile capital: the example of the U.S.

Another example could be seen in the United States.  This country has one of the highest corporate tax rates in the world. It is 35% and almost 40% when state taxes are added.  For this reason, some American companies have “relocated” outside the country, through mergers with or purchases of a foreign company.  This way they become a foreign entity and can be still managed from the U.S. but because of their headquarters address (at least on paper) they are no longer subject to U.S. corporate taxes. They are taxed according to that foreign country’s rules. Therefore, this business behavior is increasingly seen due to high corporate rates that companies are trying to avoid.

Another reason for this tax behavior in the case of the United States is because its corporate tax system could be considered different compared to most other developed countries systems.   This country taxes corporations based on the profits they make worldwide as opposed to profits they make at home.  On the other hand, other countries tax corporations for the business that takes place in their own territory. So there are American companies earning money overseas, and since they do not have to pay U.S corporate tax until they repatriate these moneys, their profits are sitting overseas as a mechanism to avoid  bringing the money home and paying American taxes.

Corporate taxes are a matter of debate in many countries due to their economic impact.  Thus, there is some concern that being tougher on taxes may do more harm than good. Those who favor higher corporate taxes argue they give governments the assets to fund programs (education, hospitals, security), to raise revenue, to encourage specific investments in specific industries, to stimulate economic growth (basically taxes provide many nations with a large source of income) for the welfare of the nation.  Others argue that lower rates help companies hire employees and producing goods, thus boosting an economy.  Although, the desire for some companies to pay lower taxes and reduce their tax bill is understandable, there are some that simply do not want to pay it at all.  And of course, they are considered by many unpatriotic corporate citizens.

What can be done about the taxation system?

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When companies leave, particularly in the case of the U.S., the country loses significant tax revenue, money that would probably be reinvested into the nation through more jobs, more improvements, more infrastructure, and prosperity in general terms.  This situation undoubtedly preoccupies the government and for this reason it is experiencing an increasing pressure to stop it, and the approach do not seem to be yielding the results expected regarding foreign inversion.  It is believed that when companies prefer business overseas to protect their income they are betraying their nation.  This situation has forced the government to implement strategies to close these tax “loopholes”, obligating companies to stay loyal to the U.S. and keep their capital into their jurisdictions. 

The bottom line is that taxes have been affecting decisions in companies concerning location and investment to manage and control their tax obligations. Because corporate taxation plays a special role in economies, nations should consider the complexity of the topic and design reforms that improve the welfare of all the parties affected and reduce the risk associated. As it was said by Kate Elliot from Rahtbone Brothers PLC:  “A total lack of tax planning is bad for investors and evasion is illegal, but we know companies operate in grey areas.  The key thing for investors is to understand where a company sits on this spectrum: how light or dark grey its tax practices are.”

Here's Everything You Need to Know About Mergers and Acquisitions

Mergers and acquisitions of companies

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External development is a form of corporate growth that results from the acquisition, participation, association or control of a company, companies or assets of other companies, broadening their current businesses or venturing into new ones. The most widely used term in corporate jargon is mergers and acquisitions (M&A).

The reasons for a company to choose external development (fusions, acquisitions, alliances...) as opposite to the internal one may have its origins in:

1. Economical reasons

●       Cost reduction: through economies of scale or economies of scope by the integration of two companies whose productive and commercial systems are complementary to each other, thus creating synergies.

●       To acquire new resources and capacities by means of the union or acquisition of another company.

●       Substitution of the management team: often, when the management is substituted, a greater increase in value occurs.

●       Obtaining tax incentives that can increase the benefits of the acquisitions and mergers, thanks to the existence of exemptions or bonuses.

2. Market power reasons:

●       It can be the only way of penetrating an industry or country, due to the existence of strong barriers to entry

●       When the mergers and acquisitions occur through an horizontal integration, an increase of market power of the resulting company is pursued, and as a consequence, a reduction of the level of competition within the industry.

●       When the mergers and acquisitions occur through a vertical integration, companies who act in different stages of the productive cycle are integrated. The goal in these cases is to obtain the advantages of the vertical integration as soon as possible, both backwards and forwards.

Types of external development

Company merger: it’s the integration of two or more companies in such a way that at least one of the original ones disappears.

Acquisition of companies: trading operation of blocks of shares between two companies, keeping their legal entities.

Cooperation or partnership between companies: this is an intermediate formula, bonds and relationships are established between the companies, without losing the legal entities of any of the participants, who keep their legal and operative independence.

In terms of the type of relationship that is established between the companies, they can be classified as follows:

●       Horizontal: the companies are competitors of each other and they belong to the same industry.

●       Vertical: the companies are located in different stages of the complete product exploitation cycle.

●       Conglomerate: Companies have very different activities from each other.

Mergers

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These are unions between two or more companies, where at least one participant loses its legal entity.

1. Pure merger:

Two or more companies of an equivalent size agree to merge, creating a new company to which they bring all of their resources, dissolving the original companies (A + B = C)

2. Merger by absorption

One of the companies involved (absorbed) disappears and its patrimony is integrated into the absorbent one. The absorbent company (A) continues to exist, but it accumulates into its patrimony the corresponding to the absorbed company (B).

3. Merger with partial contribution of assets:

A society (A) contributes only a part of its patrimony (a) next to the other company with which it merges (B), be it to a new society (C) created in the merger agreement, or to another pre-existent society (B), which as a consequence increases in size (B’), it is necessary that contributes assets (A) does not dissolve.

Acquisitions

Company participations or acquisitions take place when a company buys part of another company’s capital stock, with the intention of dominating it completely or partially.

The acquisition or participation in companies will allow different levels or degrees of control according to the percentage of capital stock of the acquired company in its power and according to the way in which the rest of the bonds are distributed among the other stakeholders: large stock blocks in the hands of a few individuals or a large number of stakeholders with scarce individual participation.

The buyout of a company can be done through a conventional purchase contract, but in the past few decades, two financial formulas have been developed.

1. Leveraged buyout:

It consists in financing an important part of the purchase price of a company by the use of debt. This debt is insured, not just for the patrimony or creditworthiness of the buyer, but also for the assets of the acquired company and their future cash flows. This way, after the acquisition, the debt ratio usually reaches high values.

The purchase may be made by the company directors themselves. In this case we’ll find ourselves before a “management buyout” (MBO). The reason why they might make the decision of purchasing the company for which they work could be to lead it towards the appropriate direction.

2.  Share Acquisition Public Offer

The Share Acquisition Public Offer is produced when a company makes a purchase offer, of all or part of the capital stock, to the stakeholders of another listed company under a specific set of conditions, usually related to price, percentage of capital stock and time.