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This is Part 2 in a 3-part series commenting on the net tangible asset value of a company.
Once all the corporate assets of the company have been adjusted from their reported net book value to their respective fair market values, the CBV will assess if any of those corporate assets are not required in order to generate the expected future operating cash flow.
These could be things like excess cash, marketable securities, loans receivable, or even something like a personal vehicle or residence. Either way, these are referred to as redundant assets. They are not required in the corporate operations, in that the company could do without them and not miss a beat. So, the CBV will value the company as if these redundant assets were not there. They are not forgotten however, and their value is generally added back at the end of the valuation exercise, although the CBV may discount that value for all or a portion of tax consequences which may arise on their ultimate disposition.
Many would argue that there is no such thing as redundant liabilities, in that they represent true and legitimate claims on the corporate assets irrespective of whether or not they were incurred in connection with the generation of operational cash flows. And I would generally agree, but with certain exceptions.
One of these exceptions is commonplace in Alberta. Often, the value of the land and building owned by the company which houses their operations has significantly increased in value over the past few years, and faster than the company itself. The value of the property may be so high that, were you to purchase the business today, you would likely opt to rent the land and building, instead of buying it. So, the CBV might deem the land and building to be redundant, and treat it as above. To be consistent, when the CBV examines the expected future operating cash flows, a notional rent would be considered, but the interest on the long-term debt associated with the property would not. And, of course, you would exclude that long-term debt from the NTAV, effectively treating this liability as if it were redundant.
In fact, there are other benefits to separating the high-value property from the operating company. A continuing owner may wish to reduce their risk through a relatively simple creditor-proofing strategy. Alternatively, a vendor may find that the overall sale price might be maximized by selling the property and the business separately, after having completed a sales-leaseback transaction, to different buyers with different interests.
In order to obtain clarification of these topics, please feel free to contact myself or your local MNP advisor.
The next step in determining NTAV is to how the value of the leveraging potential, if any, should be considered.
More From This Series:
Part 1 - Fair Market Value
Part 3 - The Value of Leverage
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