Advertisement

Negative Redundancy

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.


Advertisement

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.




Advertisement

Share this Term

  • Facebook
  • LinkedIn
  • Twitter

Related Reading

Tags

ValuationTangible AssetsNet Assets

Trending Articles

Go back to top