What are the ‘Tangible Assets’ of A Business?

Tangible Assets

The tangible assets of a business are primarily physical assets with a monetary value that depreciate over time. Examples of tangible assets include equipment, machinery, land, buildings, accounts receivable, and inventory. Tangible assets play an important role in determining the valuation of a business, and must be properly defined and disclosed to a buyer when selling a business. The depreciated value of the tangible assets of a business may typically be seen in its most recent tax return. Buyers of business may physically inspect the tangible assets prior to buying a business during the formal due diligence phase.

Intangible Assets Non-Physical

While the tangible assets of a business are physical in nature (with the exception of cash and accounts receivable which are typically not included in a business sale), the intangible assets of a business are non-physical in nature and include a company’s brand, goodwill, customer list, employee relationships, and intellectual property. In most cases, the intangible assets of a business drive a company’s cash flow or owner benefit. Valuing the intangible assets is a function of the future cash flow generated by a business, and must be carefully conducted by a professional business broker. By contrast, the value of tangible assets have discrete monetary values which are more easily obtained.

Tangible Asset Value Important in ‘Asset Sales’

The sale of a business which is breaking even or losing money is deemed as an ‘asset sale.’ In an ‘asset sale’, the value of the business is not much more than its tangible assets. Since no cash flow or owner benefit exists, the intangible value of the business has little or no worth. In an ‘asset sale’, a close inspection of the company’s tangible assets (such as equipment, machinery, vehicles, inventory, and accounts receivable) should yield a quantifiable monetary value. It is important to remember that the actual value may differ from the depreciated amount of the assets in the company’s tax returns. Often, a business will improperly define the depreciated amount of its tangible assets on their tax returns, so the currently depreciated worth should be used when valuing tangible assets.

Current Tangible Assets

  • One type of tangible asset is called a current asset.
  • A current asset is an item on the balance sheet reflecting a tangible asset which may be converted into cash in less than a year.
  • Examples of current assets are cash, accounts receivable, and inventory.
  • As noted, accounts receivable – or money owed to a business owner from products previously sold or services previously rendered – are typically not included in a business sale.
  • They are usually retained by the seller since the seller already sold the product or performed the work.
  • Similarly, cash on the balance sheet is almost always retained by a seller in the typical business transaction.
  • Inventory refers to goods produced by a business that is available for sale, as well as raw material used for the production of goods.
  • In many business deals, inventory is sold separately because it can fluctuate greatly over time.
  • For many retail-related businesses, inventory is a major component of a business deal, and is always valued at cost (rather than its retail value).

Long-Term Tangible Assets

The other type of tangible assets is called a long-term asset (or fixed asset). A long term tangible asset is a physical asset which will benefit a business for more than one year. Classic examples of long term tangible assets include equipment, vehicles, machinery, and real property. The value of a long term tangible asset is reflected on the balance sheet as a capital asset. A capital asset will have a depreciation schedule whereby the business owner may depreciate or deduct part of the carrying cost of the asset over time. Long term tangible assets are less liquid and harder to quantify than current assets. The monetary value of most long term assets, however, can be ascertained by researching ‘blue book’ values or other means (depending on the industry) of identifying its value.

Tangible Assets Impact Business Valuations

The value of most businesses arise from a multiple of their annual adjusted owner benefit.  When computing the adjusted owner benefit for the purpose of a business valuation, it is crucial to remember that depreciation charges are ‘added back’ to the owner benefit. In other words, depreciation is an accounting charge for a previously purchased tangible (or intangible) asset, and is not a cash expense applicable to the current owner or to any future buyer of the business. Thus, when a business owns tangible assets, the costs of the tangible assets (via depreciation) on the income statement are not deducted from the owner benefit. This impacts the business valuation because the valuation is predicated on the owner benefit.

Example of How Tangible Asset Impacts Business Valuation

  • Let us assume that Barry is selling his physical therapy center business.
  • Barry hires a business broker to evaluate his business.
  • The first task in evaluating the business is determining Barry’s adjusted owner benefit, or the true economic profit derived by a working owner of the business.
  • The broker discovers that in its most recent financial statement, the business has $250K of taxable net income and a $20K depreciation charge.
  • This depreciation charge must be added back to the net income in order to properly determine the adjusted owner benefit (other adjustments or ‘add-backs’ must also be made such as adding back the owner’s salary and any personal expenses of the owner that flowed through the financial statement).
  • Barry explains to the broker that a few years ago, he purchased $200K worth of equipment for his clinic.
  • This purchase constitutes a long-term tangible asset or fixed asset, and is displayed on the balance sheet as a capital asset.
  • Over time, this capital asset is depreciated (let’s assume at $20K/year in our example), with the depreciation reflected in the income statement.
  • The good news from Barry’s perspective is that the business valuation will not suffer from the $20K/year of annual depreciation charges.
  • Rather, it is added-back to owner benefit, resulting in an owner benefit of $270K.
  • The valuation of Barry’s business is a multiple of owner benefit (let us say 3 x $270K of owner benefit resulting in a $810 valuation), so the higher the owner benefit, the higher the valuation.
  • The buyer of Barry’s business will be able to use the depreciation charges himself after the sale (reducing his own taxes), while of course still receiving the tangible asset (which enhances the overall valuation of the business).

In the context of business sales, tangible assets must be properly identified as either current tangible assets (not usually included in the sale) or long term tangible assets that benefit the business for more than one year (usually included in the sale). Long term or fixed tangible assets are depreciated over time, so the costs of acquiring them are not counted against the business valuation.

Give Martin at Five Star Business Brokers of Palm Beach County a call today at 561-827-1181 for a FREE evaluation of your business.