4.23: Redundant assets

Some terminology used in business valuators’ reports is less easily understood than others. Redundancy sometimes implies no value. This is not the case in valuators’ reports.

Redundant assets are those assets that the business does not require to generate the expected level of business. These assets could be withdrawn from the company without impacting the profitability of the business. They are assets not actively used in the business. If left in place the company may not be recognized as a “qualified small business” for capital gains tax treatment.

Redundant assets are usually found in:

  • excess working capital
  • advances to related parties
  • other non-operational investments

Redundant assets are assets owned by a business that are not required to generate the level of cashflow used in the calculation of enterprise value.

Where an income-based valuation method is used, redundant assets are added to the enterprise value to establish the total business value. Where an asset-based method is used, no adjustment is needed for redundant assets.

Estimating redundant working capital is not an exact science. A CBV’s professional judgment is required. Some guidance is found in working capital ratios, operational ratios, industry “norms”, banking covenants and, to a certain extent, management preferences.

Real estate and other major capital assets are sometimes treated as redundant assets, provided a notional corresponding charge for their usage is made to the pro forma cashflow statement.

Unused borrowing capacity may also be treated as a redundant asset, on the basis that funds could be drawn on the facility and paid out as a dividend without impacting normal business operations.

Contact MVI for help understanding how the redundant assets in your valuation report have been calculated.