What Does Negative Redundancy Mean?
Negative redundancy refers to when a business is undercapitalized. A firm’s capital structure may be over-levered when compared to industry norms and the degree of over-leverage is considered a negative redundancy. It is assumed that a prospective buyer would need to inject additional capital to get the business to industry appropriate operating levels.
Divestopedia Explains Negative Redundancy
When determining the value of a business under the capitalized earnings method, negative redundancies are treated as 1) an increase in the normalized earning by the interest cost of the reduction in debt, and 2) a reduction of the fair value by the total amount of the under capitalization.
Negative redundancy is a theoretical business valuation concept. When a business is sold, the transaction is usually completed on a debt free basis. This means that a buyer will raise their own financing and employ their own capital structure to close the deal. In this case, the concept of negative redundancy is not relevant.