Why Should Business Owners Identify Redundant Assets at the Time of Business Valuation?

Every business has a value. Your business may be priceless to you but may have a different value for the buyer or investor. Many entrepreneurs get their business valuation done when looking to sell it. The valuator asses the fair market value of your business assets and liabilities, and that’s where the concept of redundant assets comes into the picture. A business owner should know about redundant assets, which could change your business valuation. 

What Are Redundant Assets and Liabilities?

Every business has different types of assets: 

• Physical assets like land, buildings, machinery, client lists, and product patents
• Liquid assets like inventory and cash
• Intangible assets like goodwill and brand value 

Not every asset is used for business operations. That asset is termed a redundant asset or non-operating asset. Redundant assets are mostly physical assets that are not relevant for day-to-day operations. It is a redundant liability if you have taken a loan to finance such an asset. 

A simple example of a redundant asset is a cottage house of a software company. The business owner might have purchased the cottage house under the company’s name and might be using it for team outings or personal use. Even if the cottage house is excluded, it would not impact the business operations. Hence, it is a redundant asset. 

However, if this same asset is owned by a bed and bath company that rents it out to visitors, it becomes an operating asset. The absence of the cottage house will impact the company’s operations. Personal assets like personal investments, vehicles, artwork, real estate, machinery, and furniture could be redundant if their absence doesn’t affect your company’s revenue and earnings. 

How To Identify Redundant Assets? 

The best way to identify a redundant asset is to see how its ownership impacts the business operations. However, some assets could still be in use and be redundant.  

Real Estate: Many business owners buy office space instead of renting it to keep more value. But that is an investment even if it is being used for business operations. The business owner could even rent out that property instead of using it, ensuring no impact on the business operations. 

While selling the business, you could continue to own the property and instead collect rent from the buyer for using the premises. If you are considering selling the office building, use a real estate appraiser to determine the property’s fair market value. 

Working Capital: Excess working capital can be a redundant asset like an owned office. Working capital is the difference between operating assets (accounts receivable, inventory, prepaid expenses) and operating liabilities (accounts payable, wages payable, tax payable). A company may have excess inventory or cash in hand than the required amount to pay operating liabilities. 

Working capital requirements may differ from business to business. A cyclical business may keep excess inventory for some months. That won’t count as a redundant asset, as removing it could affect business operations. In such a scenario, the valuator carefully assesses working capital requirements, looking at the operating cycle, payment cycle, working capital pattern, and more to determine any hidden redundant asset value.

This brings us to a question: Why do you even need to identify the value of redundant assets in the first place? 

How Redundant Assets Can Affect Business Valuation 

When valuing a business, the valuator will determine the value of business operations, and it will exclude redundant assets from the equation. They will separately add the value of redundant assets to determine the value of the shares. This separation is vital because you want to ensure you are only selling necessary assets the buyer is interested in. 

The buyer offloads many assets in many acquisitions as they don’t add value. The business valuation depends on what the buyer is interested in. Buyers generally look at three things: 

• Balance sheet to determine the debt and the physical assets needed to run the operation. For instance, a service company’s most priced asset is its client list and goodwill, which interests the buyer. 
• Cash flow to determine if the operations are generating sufficient cash flows to support the business. 
• An income statement is used to see the profitability of the business operations. 

The buyer may only be interested in the business operations and would be willing to offer you a premium for that. However, the buyer may not be interested in that office building. You could retain that with yourself or sell it separately to a REIT to derive better value. 

As redundant assets don’t contribute to earnings, they are excluded from the sale of a business. Experts are needed to identify such assets and value them. 

Contact DDL & Co. in St. Catharines to Help You with Business Valuation 

A skilled accountant can help you value your business and prepare it for sale. They can also evaluate the company and enhance its value. To learn how DDL & Co. can provide your business valuation, contact us online or at 905-680-8669.