What Does
Redundant Assets Mean?
Redundant assets are those assets that are not specifically required by a company to generate earnings and cash flow from operations. They are "redundant" to the operations of the business. Typically, the valuation of companies for sale are conducted excluding any redundant assets and their related income and expenses. The buyer assumes that the redundant assets will stay with the seller, or alternatively adds the fair market value of these assets to the calculated net present value of future cash flow from operations.
Redundant assets can include cash and other marketable securities which have accumulated in a company’s balance sheet. They may also include real estate (unless it is a real estate or development company), equipment, or other tangible assets that aren’t directly used in the provision of services or goods of the selling company. Any additional non-cash working capital that is in excess of what is required to support the company’s revenue would also be a redundant asset.
Divestopedia Explains Redundant Assets
For a seller, separating cash and other marketable securities as redundant assets is simple because the value is readily available. Sellers should be more cautious when estimating what incremental non-cash working capital is redundant to the regular business operations, since underestimating this number would result in less cash ultimately being realized from the sale.
A good approach is to review the level of accounts receivable and payable over the last 12 months and compute an average. If the net level at the transaction date is higher than the average, then the excess is redundant and should be kept by the seller or purchased via an increase to the purchase price.
With real estate, it is often more advantageous for the seller to keep it and lease it back to the buyer. This avoids the issue of valuing the real estate as well as realizing on any income tax that would be triggered from selling it. By keeping the real estate and leasing it back, the seller is assured a tenant without having to monetize the equity along with the related tax implications.