Johnson & Johnson sells its factory on slump sale basis. Here is what slump sale means

Johnson & Johnson has sold their second Indian manufacturing plant to a pharma company via a slump sale. Here's why companies opt for a slump sale, what it is, and why it is preferred by companies who want to sell off their not-so-profitable businesses. 

As per Economic Times, Johnson & Johnson (J&J) has sold its largest manufacturing plant in the country at Penjerla in Telangana to pharma company Hetero on a slump sale basis. Pharma company Hetero spent Rs 130 crore to buy J&J's manufacturing plant, land, and machinery. But how is it different from a normal business sale and why do companies prefer such 'slump sales'? 

Why do companies opt for a slump sale? If a business owner runs a large business that is also a listed company, chances are high that this company will have spread its wings and have multiple business operations going on. For eg: Reliance Industries Limited has hundreds of subsidiary companies that operate separately under categories like retail, oil, FMCG etc. Each subsidiary company has its own assets and liabilities and a complete team to manage it like a separate business. 

Now when large companies usually track their business growth, they do so by tracking the growth of each business. So when a particular segment slacks down or is not performing on par with the required standards, the company might decide to sell off this particular segment entirely.

Selling an entire business entirely helps a company maintain only efficient business operations and weed out or change the companies with the negative synergies. In a way, companies also get tax and regulatory benefits when they opt for slump sale. 

What is a slump sale? In normal situations, a company's management usually sells off its assets and liabilities one at a time, after valuing each asset and liability individually. But since businesses usually want to dispose of their loss-making companies quickly and with as much profits as possible, they might opt for selling off the business entirely on a lumpsum basis ie on a slump sale basis.

When the management decides to sell off a company on a 'slump sale' basis, the company is valued at a lump sum basis without considering the individual value of its asset and liabilities. 

Why might J&J have opted for a slump sale? In the case of Johnson and Johnson, since the company is listed in the US and has global operations, it most likely operates in various regions through separate business entities. Also since the company has planned to shut down its baby powder production globally from 2023 because of knowingly selling contaminated talcum powder, the company's reputation has taken a toss. The company's revenues fell by 49% in a year and the Maharashtra government even canceled the manufacturing license of its Mulund plant a few months back. 

Since J&J plans to transition into selling corn-based talcum powder and may even restructure its business processes, the idea of slump sale might be the most convenient for J&J. 

How is it better than an itemised sale? Companies have to pay NIL rate of GST on slump sales whereas there might be a different tax payable in case the business is sold through normal methods. Also when assets are sold one item at a time, the sale of depreciable assets will attract a short-term gain of 30% while selling through a slump sale attracts a short-term gain of 20% if the company has operated for more than 3 years.