Asset sales

Asset sales
See also
Authorized Stock Equity instrument Contingent consideration External sources of finance Issued share capital Property Dividend Asset based approach Non current liability Trade receivables

Asset sale is selling assets of one company to another. The buyer acquires real assets (e.g. machinery, patents) and can use them in other company. The seller retains ownership of the company. All the liabilities have to be paid by the seller. Thus buyer takes minimal risk - no liabilities are related to bought assets, and their value is more real than in case of shares.

Asset sales are often associated not only with selling assets, but also transferring employees, customer and supplier contracts. The new company has no debts and can operate on its own. The old, selling company is left with debts. It is able to obtain loans for current operation.

Asset sale is one of types of financial restructurization of the company during the crisis.

Assets sales allows the company quikly cash flow increase. Cash obtained from asset sales can use to investment or loan repayment. First, in contrast to the cash flow variables cash obtained this is not probably to be positively connected to the firm's investment opportunities.

For example, the sale of assets not related to a firm's core operations is unlikely to move news about the growth chance of the firm's remaining lines of business. Also, the sale of assets from a firm's core business may point out that the selling firm's growth chance are disadvantageous, which would falseness the results against proposal, a liquidity effect. Next, asset sales may growth the quantum of funds.

Mainly the companys guided two motivations for voluntary asset sell-offs. The first is that voluntary asset sales allow firms to restructure - operations to attain higher operating efficiencies by selling assets to more productive users or by selling assets that have minus synergies with the sellers’ core businesses. Asset sales are privately negotiated transactions and can present a less expensive means of raising capital than public issues of debt and right for those firms facing information problems. Consequently, financially constrained firms may sell assets to improve cash for alternative investments. In either case, we hope to see a much powerful relation from asset sales and investment for financially constrained business (Hovakimian G., Titman S. 2006, p. 2).

Examples of assets sale

The company can sale fixed assets and current assets.

Fixed assets consists with:

• Intangible assets
• Tangible fixed assets
• Long-term receivables
• Long-term investments
• Long-term prepayments

Current assets consists with:

• Inventory
• Short-term receivables
• Short-term investments
• Short-term prepayments

It's easy sale and measurement aassets tangible fixed assets and inventory that intangible asseets it's not the same. Difference betwixt Tangible and Intangible Assets Intangible assets are goods and rights that are nor physically nor financially vivacious. Thus, it's severely to identify, measure and steer them. Intangible assets are partially acknowledge in financial reports, mainly in balance sheets. Since of their heterogeneity, intangible assets are not naturally traded in the market place. Tangible and intangible assets are unlike in terms of public appearance, transfer costs, depreciation, simplicity of recognition of trading chance, variety, disclosure of characteristic, extension and enforcement of property rights.

Introduction of new accounting rules had a grave effect on the valuation and reporting of intangible assets in the financial report of the firms. Many blue chip companies globally are now needed to statement about intangible assets under International Financial Reporting Standards (IFRS) rules, with some excerpts like South Korea, Switzerland, Japan,Canada and major South American companies. After 2001, IFRS now needs separate revelation of intangible assets on an acquiring company's balance sheet on acquisition if it meets all the test for valuation of intangible assets (Pankaj M. 2009, p. 14-18).

There are different methods for valuing intangible assets for example (Pankaj M. 2009, p. 14-18):

• Cost approach - valuation of intangible assets is likely on the basis of their ‘cost to create’ or what it may cost to reproduce a similar type of asset, with equivalent consumer appeal or commercial utility
• Market approach (sales comparison) - approach, where fair value of an intangible asset is decided by making simile with real sales of alike assets
• Income approach - estimation of the value of intangible assets is done approach by considering the Net Present Value (NPV) of the stream of future benefits falling to the asset owner.

Advantages of Asset sales

Asset sales offer a variety of advantages for both buyers and sellers. For the buyer, it can offer a great opportunity to acquire assets at a discounted rate and potentially add value to their business. For the seller, it can enable them to monetize their assets and free up resources for other purposes. The following are some of the key advantages of asset sales:

• The buyer acquires real assets, such as machinery and patents, that can be used in their business.
• The buyer takes minimal risk, as they are not liable for any liabilities related to the assets they purchased.
• The buyer is able to acquire the assets at a discounted rate, which can potentially add value to their business.
• The seller is able to monetize their assets and free up resources for other purposes.
• The transaction can be completed quickly and efficiently, as there is no need for a lengthy negotiation process.

Limitations of Asset sales

Asset sales have some limitations which must be taken into account when considering this method of selling a business. These include:

• The seller is still liable for any debts and liabilities associated with the business. This means that the buyer must ensure that the seller can pay off any outstanding debts, or they may end up liable for them.
• The buyer may be unable to get a loan to purchase the assets, as lenders may not consider the assets as collateral.
• The buyer may not be able to get full value for the assets as they are only buying a portion of the business.
• The buyer does not acquire any of the intangible assets such as customer relationships, trade secrets or brand recognition.
• The buyer may have difficulty integrating the assets into their own business due to compatibility issues.
• The buyer may have difficulty finding a buyer for the assets if they decide to divest them.
• The seller may be able to retain certain rights to the assets, such as intellectual property rights, which can cause problems for the buyer in the future.

Other approaches related to Asset sales

An asset sale is one of many approaches to transferring assets from one company to another. Other approaches include:

• Mergers and acquisitions – this is when two companies decide to join forces and become one entity, usually with the larger company taking over the smaller one. This can also involve transferring assets to the larger company.
• Joint ventures – this is when two companies come together to form a specific project or venture. They may share resources and assets to achieve a common goal.
• Equity sales – this is when the owners of the company sell shares of the company to investors. The investors become part owners of the company and are entitled to a share of the profits.
• Spin-offs – this is when a company decides to divide into two or more entities and separate its assets into the new entities.

In summary, an asset sale is one of many approaches to transferring assets from one company to another, but it is not the only option. Mergers and acquisitions, joint ventures, equity sales, and spin-offs are all other approaches that can be considered.

References

• Edmans, A., & Mann, W. (2018). Financing through asset sales'. Management Science.
• Hovakimian, Gayane & Titman, Sheridan. (2006). Corporate Investment with Financial Constraints: Sensitivity of Investment to Funds from Voluntary Asset Sales Journal of Money, Credit and Banking, no. 38. p. 1-28.
• Madhani, Dr. Pankaj. (2009). Intangible Assets - An Introduction The Icfai University Press, p. 12-19.
• Committee on Bankruptcy and Corporate Reorganization. (2010). Non-Bankruptcy Alternatives to Restructurings and Asset Sales New York City Bar Association, p. 1-27.

Author: Paulina Pietroń