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Selling an asset rich business
An asset rich company is one with valuable tangible assets, such as property, plant, equipment, vehicles and inventory. Some businesses tend towards being rich in assets. Retail stores that have cash tied up in inventory to sell are examples of asset-rich businesses, as are agricultural companies that might own land or livestock. Manufacturing companies that own a lot of equipment are also asset rich companies
If you’re planning to sell an asset rich business, there are some important things to consider as far as those assets go. Even if you’re not planning to sell now, putting processes in place to protect your assets can give you a head start if you choose to sell in the future.
Buyers will want to know the maintenance history of your equipment, making it important to keep a maintenance history. Schedule regular routine checks for your tangible assets and keep a maintenance log from the moment you purchase any equipment. Keeping track of any repairs as well as routine maintenance activities lets you show how machinery has been cared for over time.
Although this is important for all tangible assets, it’s especially important for machinery and equipment. Buyers will want to be assured that the asset will not break down soon after the sale, especially if it’s part of the process that makes the company money, such as manufacturing equipment or delivery trucks. A complete maintenance record is going to prove very useful when prospective buyer looks for price-negotiation points.
Depreciation is the decrease in the book value of your assets over time. Different types of equipment and different industries have standard IRD-authorised depreciation values, so it is important to discuss these figures with an accountant.
For the most part, the buyer is going to expect the depreciated value of your fixed assets to be a component of the purchase price of the business. The current depreciation schedule is part of your annual accounts. Make sure your accountant is aware of assets disposed of or bought.
You accrue taxation benefits from depreciation each year. It’s effectively represented in your accounts as a cost. It’s important to remember that if you assign a value to fixed assets within the sale price of your business that is higher than their depreciated value you may become liable to repay the taxation benefit. Any variation to depreciated values needs to be discussed with your accountant.
Businesses sometimes experience mediocre profitability for a variety of reasons and for varying time periods. Profit is the primary determinate of value. If a business operates with a high fixed asset value it may be that the intangible (or goodwill) value appears disproportionately low when the appraisal has been applied to a period of low to medium profitability. Plan your capital expenditure strategically; obviously you should maintain optimum production efficiency. But recognise that if you put the business to the market soon after significant capital expenditure, you’re probably going to have to accept a lower intangible asset return.
It's good practice for a business owner to continuously maintain a capital expenditure, depreciation and intangible asset watch. Talk to your LINK business broker. They’ll be happy to institute a regular appraisal review process so you can track progress.
For more information on selling your business, or a business value appraisal, find out more information here: