Most businesses, over their lifetime, buy assets that are needed to earn more revenue. However, they also acquire assets unrelated to the business to diversify their income or generate passive income sources that can sustain them during a business downturn. For instance, a logistics company may buy three to four warehouses and use them to earn rental income, or an IT company may invest in stocks to earn dividends and capital gains.

Sometimes an asset becomes redundant due to a change in business model or a shift in business focus. A tech company may have several unused patents, or a publisher may have a stack of unpublished books. Patents and books are business assets for these companies, as they could have generated business income had they been utilized. But since they were unused, they are redundant at present. 

But why are we talking about redundant assets?

These assets are treated differently from your business assets that are actively generating operating income when valuing a business. If you are considering selling your business, you should classify and value redundant assets separately. 

Classifying an Asset as Redundant

While speaking about redundant assets as a standalone object is easy, identifying them is difficult, as they are not apparent on the face of the balance sheet. They can be hidden between your tangible, physical assets, such as excess working capital, real estate, excess investments in stocks, the machinery used in the 80s, or that antique chair at the reception. They can also be in the form of intangible assets such as unused patents, obsolete brand names, or old customer lists. 

One way to know if you have a significant amount of redundant assets is to calculate the asset turnover ratio (net sales/average total assets). A lower turnover ratio could mean several assets are not generating operating revenue. If redundant assets are generating non-operating income, they could supplement volatility in operating income. However, if redundant assets are not generating any income, they are likely consuming space and incurring costs if they are unused property or machinery. 

When preparing your business for sale, consider repairing the business and improving its financial ratios to secure a premium price.

How Should Small Business Owners Value Redundant Assets?

Although some assets may be redundant, they still hold value. And some redundant assets carry higher value on a standalone basis. For instance, redundant assets such as boats, recreational vehicles, and cottages can be utilized by you and your team for team outings and, for the remainder of the year, generate rental income. If you value these assets like other operating business assets, such as equipment, it may not give the real picture. Equipment is capitalized and depreciated over its useful life. This depreciation was deducted as a business expense. But that is not the case with the boat or cottage.

For such redundant assets, value is determined using the Net Realizable Value (NRV) method, wherein you estimate the price you could get by selling the asset and deduct disposition costs, taxes, and costs incurred to prepare the asset for sale.

How to Treat Redundant Assets When Valuing a Business

Suppose you are in the business of selling tires, and you bought a boat for $95,000 under the business name. The estimated sale value of the boat is $70,000. You spend $5,000 on enhancements and paint work to sell the boat, and then incur another $5,000 in disposition and taxes. Your NRV is $60,000.

The boat did not generate operating revenue and has nothing to do with your tire business. A potential buyer of your tire business may not be interested in the boat and might offload it at a lower price to reduce the maintenance cost. However, a yacht service company might be interested in buying the boat and may even pay you a better price for it.

You can exclude the value of redundant assets, like a boat, when valuing your business for sale. A professional accountant can help you find ways to transfer redundant assets from the business in a tax-efficient manner.

What Can Small Business Owners Do with Redundant Assets?

Small business owners always look for ways to make the most of the resources and assets they have. You can get creative and look for ways to extract maximum value from redundant assets now that you are considering selling your business.

• Sell or Rent Redundant Assets: If your redundant asset is furniture or real estate property, consider finding a buyer who can offer a premium price for it. Or you could consider leasing or renting it and earn passive income. However, ensure the income is higher than maintenance costs.
• Dispose of Asset: Some redundant assets might not have any value, such as outdated software, computers, or machinery. It may not be easy to find a buyer for such assets. They are just occupying digital and physical storage space for which you are paying a storage and maintenance cost. You can consider disposing of these assets and deriving value from the sale proceeds, savings on maintenance costs, and better use of storage space in other income-generating activities.
• Repurpose Asset: Another strategy involves finding a new use for the redundant asset or reviving it. For instance, you can focus on those unused patents or unpublished books, try upgrading them to increase their value, and sell or use them to generate business revenue. You could also upgrade the old furniture with new designs and sell it at the price of new furniture. 

Contact Glenn Graydon Wright LLP in Oakville to Help You with Business and Asset Valuation

Redundancy is subjective and should be carved out carefully. A skilled accountant with a good understanding of your industry can help you find hidden value in redundant assets that no ratio or balance sheet shows. At Glenn Graydon Wright LLP, our accountants and business consultants offer services including business valuation and value improvement strategies. To learn more about how Glenn Graydon Wright LLP can provide you with the best accounting and business consulting expertise, contact us online or by telephone at 905-845-6633.