Regardless of whether a business is being sold or bought, the assets of a business are always an important factor in a commercial transaction. They form the blueprint of what the company consists of and aid the buyer to decide what to acquire.
These are assets that are purchased for long-term use. As a result, it is unlikely that they will be able to be converted into cash quickly (an issue if the company starts to struggle with its finances). Nevertheless, fixed assets play an important role on the business’s balance sheet and can be a major factor in deciding whether a buyer commits to purchasing a business. Fixed assets are usually acquired to assist the business in their operation (e.g. the production of goods or aids the business to provide a service). Consequently, the bigger a business’s fixed asset is, the more security it will have that it will always be able to carry out its specific type of business. An example of this is if McDonald’s decided to buy a small independent restaurant in a prime location (I know it is hard to imagine any location without a McDonald’s). Even though the small independent restaurant may not be making a large profit, if it has the necessary resources (fixed assets) that McDonald’s can benefit from in the long term, this may persuade McDonald’s to purchase it.
On the other hand, a large amount of fixed assets may be an issue if a buyer is intending to acquire a business and change its primary function. In this scenario, a buyer may want to get the fixed assets independently valued to decide whether it is worth acquiring these with the business (to sell the unnecessary assets on for a profit) or to just obtain what it needs by way of an asset purchase agreement.
Fixed assets usually consist of property (leasehold or freehold), plant and machinery (whatever is used by a business to carry out the business), equipment, tools, furniture and any long-term investments.
This usually comprises of cash and other assets intended to be converted into cash with a 12-month period. The current assets state how much cash (or assets that can be converted into cash) the business has e.g. to pay its employees, its debt, its loans and liabilities. The current assets of a business minus its current liabilities, will provide the working capital. The working capital is a very telling sign of whether a business is tittering towards insolvency, as it shows whether a business has the assets to operate.
Current assets usually consist of cash/cash equivalents, money orders, cheques, stock, inventory, pre-paid expenses and short-term investments e.g. shares.
Please feel free to contact Lawdit’s Commercial Department to discuss any questions regarding the purchase or sell of a business.