When a buyer is looking at a company for acquisition, they come to the inevitable question of value. A diligent, serious buyer will probably ask the following questions:
- What is the company worth to them?
- What is it worth to the current owner?
- What will their bank think of the value being offered or paid?
Fixed asset registers can offer an accurate summation of a business' value by recording property, plant, and equipment (PPE), tangible assets, and other long term assets. An accurate ledger helps a company remain compliant, and also helps with future planning.
What is a current asset?
Current assets can be converted into cash within a single operating cycle, or one financial year. They are liquid, and can be used to facilitate operational expenses and investments in the short term. These are recorded in a current asset register.
A company's short term current assets include:
- Accounts receivable
- Cash and certificates of deposit
- On-hand inventory
- Prepaid expenses
Current assets are not recorded in the fixed asset register, as they are not subject to the same long lifespan as fixed assets.
What is a fixed asset?
Most examples of fixed assets are non-current, have a life of more than one year, and are tangible, meaning they are used in day-to-day business and production.
Here are some examples of fixed assets:
- Office equipment and furniture
- Machinery and vehicles
- Buildings and land
In short, fixed assets are the ongoing assets that a company holds. They are recorded in their own fixed asset register.
A fixed asset register is a journal of a company's long term assets, usually with many sub-accounts. A fixed asset register feeds into a company's main ledger as a subsidiary, which is used to construct accurate financial statements.
What's the difference?
The differences between current assets and fixed assets are largely attributed to their lifespan and liquidity:
- Fixed assets depreciate over the course of their useful life, while current assets do not.
- Fixed assets cannot be liquidated easily to meet current expenses, while current assets can.
- Fixed assets have a life of over one year, while current assets are generally liquidated within one operational cycle
Why keep an accurate fixed asset register?
Recording an accurate fixed asset register is incredibly important for businesses. Buyers and investors need to know where a company is allocating capital in the short and long term. An accurate fixed asset register allows companies to expand with stability, while adding ongoing value.
There are many benefits to recording an accurate fixed asset register ledger, including:
- Providing an accurate summation of yearly depreciation
- Forecasting asset maintenance and cashflow
- Allowing the company to secure ongoing finance
- Recording assets to prevent theft
- Determining business value in preparation for sale, exit, or succession
A poor or inaccurate fixed asset register can make it difficult to even generate offers the sale of a business, let alone great offers. An accurate ledger builds confidence and trust with potential buyers.
What about the value of goodwill?
In most acquisitions, the buyer will end up paying for assets, and will often take on some liabilities. Most of the time there will be an element of goodwill. Goodwill is the difference between the net assets of the business and the amount paid.
Buyers are often apprehensive to pay for goodwill, being an intangible asset, which is difficult to define. It also provides no tax benefit to a company going forward, and for accounting purposes goodwill can only go down, never up.
During diligence on prospective clients, the team at Nash Advisory often discover that many businesses have poor records for their fixed asset register. It is either inaccurate, or is missing information on original cost, depreciation, and net book value of fixed assets.
As financial experts, we want to achieve the best sales outcomes for our clients. We can improve these outcomes in a few easy steps:
- If a company has a strong fixed asset register, we can present detailed information to the buyer.
- We can then determine if the market value of these assets differs from the net book value.
- Most of the time this process increases the value of the assets, leading to greater sales results.
In summary, a strong accurate fixed asset register allows us to help to increase the purchase price. A buyer will look favourably on great fixed asset information, and take comfort in the market value.