By Abhi Mathews, CBV, CFA
Redundant assets are those that are not required to operate the business and can be withdrawn without an impact on operating cash flows. These are assets which are excess to the Going Concern Value of the operating assets of a business. The key takeaway is that extracting the identified redundant assets from the business do not affect the return or the risk related to the business operations.
Usually, the net realizable value (net proceeds upon the sale of an asset, after providing for all disposition costs) of the Redundant assets is added to the Going Concern Value of the operating assets of a business to arrive at the entire price / value of the business interest. In business transactions, a vendor typically would not sell his business as a Going Concern without either extracting the redundant assets or adding their net realizable value to the value of the operating assets. The costs of disposition, such as legal fees, commissions, income tax consequences related to the disposition are deducted from the gross proceeds to determine the net realizable value, or the net cash available for distribution to shareholders.
Careful consideration of the balance sheet and operating characteristics is usually necessary to determine redundant assets. Common redundant assets include excess cash, marketable securities, related party loans, leverage availability, personal assets and others. Typically identification of redundant assets will be straight forward, but it is not always the case. Redundant assets that are not straight forward to identify include excess working capital and insufficient working capital (a negative redundancy) among others. Talk to your local business valuator to find out more details.
At Minerva Valuation Advisors, we are trained, as business valuators and financial analysts, in a variety of settings including in tax planning valuations, family law valuations, shareholder disputes valuations and merger & acquisitions valuations and advisory.