No Due Diligence would be complete without a thorough investigation of the assets a business has acquired. The BusinessPortal range of websites do this in the Assets section and you’ll find that it considers factors that the statement of assets in financials doesn’t. That’s because the value of assets in “real life” isn’t always the same as the value of assets as represented by accounting standards. In accounting, assets are depreciated by a formula that suggests they’d lose all their value in a specified amount of time (Property isn’t depreciated, buildings generally over 20 years, furniture over 5 years, electronics over 3 years etc.). In the “real world”, assets are worth what someone would pay for them today (rather than what was paid for them when they were first acquired). When buying into a business, it is important to investigate both of these asset evaluations. The “real world” price is likely to be worked into the value of a business fairly directly while the current accounting value of assets bought has import on the (accounting) equity value of the company. The value of financial statements and their importance in a due diligence will be investigated in the last blog post in this series. Also see, “What you really want to know when investing in- or buying a business”.
From a management account point of view there are 2 types of assets; Income generating- and non-income generating-. Income generating assets are the ones that are required for production (such as Raw Materials and Equipment), Stock on hand (since it can be sold for income) or assets that earn rent (Property), dividends/profits (Business Interests) or interest (Loans Given or Negative Balance in Loan Account). Non-income generating assets are things like Properties that aren’t rented out (say the company owns the land it’s on) or other assets the company has bought (or pays for) that are not directly required for the production of their product/service.
There are several important things to note about the assets of a company one is considering investing in (beyond the value of assets). Some examples of these are:
- The state and current serviceability and thus the future need for replacement of assets (especially if they are required for production).
- The amount of assets that are hard to value or that have volatile prices (such as stakes in other businesses or commodities with volatile or cyclical markets) as well as the companies reliance on supply of these commodities.
- The ratio of income-generating- to non-income generating assets (as an indication of the level of spending on assets that might be superfluous or extravagant).
- Are the assets in the name of the company or in the name of separate stake holders and would transfer costs apply on investment.
In the next blog post I’ll consider the companies Liabilities and other monthly costs.