How Absorb Works

The term absorb in business is used to describe the process of incurring new costs during manufacturing goods and redistributing them so as not to pass the extra costs on to the consumer. It is this process that allows for the marketplace to hold stable prices. When a manufacturer accounts for minor fluctuations in the costs of raw materials and the production of goods, prices for middle-men buyers hold and allow the middle-man buyers to pass on the stable pricing to consumers at a retail market.

The term absorb may also apply to corporate mergers and acquisitions. When a company purchases a different company, all of the debt and assets associated with the purchased company are acquired by the purchaser. This will cause a rise or fall in the debt to asset ratio of the purchasing company, increasing its wealth or increasing the debt. This is how one company absorbs a second. It acquires the business model and rights to the name and intellectual property and its stock portfolios and other assets, including its employees.

Example of Absorb

Considering the second definition of absorb, an example of absorb is when the John Doe Corporation purchases The Sally Jean Company. The Sally Jean Company was an older, smaller company that was not running as effectively as its owners thought possible. Realizing it was time to sell, they sold to John Doe Corporation. This was a larger corporation with access to better funding, and the owners thought the John Doe Corporation would run their company well.

As a result of the sale, the Sally Jean Company had to liquidate some of its assets. This included the building the employees worked in. As a result, the Sally Jean Company employees were now employees of the John Doe Corporation. These employees moved into a new office space and continued doing their assigned tasks.

The sale of the Sally Jean Company to the John Doe Corporation allowed all parties to move forward from the business. When the John Doe Corporation took on the smaller company, it stood a chance to further its own business and increase profits over time. In addition to monetary gain, the employees of the Sally Jean Company were able to stay employed. This gave the John Doe Corporation a capable staff familiar with daily operations to move forward within a new business venture.

Absorb vs. Dissolution

Corporations may absorb one another when they come together in a merger. This can be beneficial. However, a company may be disbanded in dissolution as well. Dissolutions can be voluntary, perhaps a company chooses to close as it is not profitable, or the owner no longer has an interest. To do this, the company in question sells off all assets, pays any standing debt, and files dissolution papers. A company can also be ordered into a dissolution. This can happen as a result of unpaid taxes or violation of government policy.