Non-core assets in corporate finance transactions

Non-core assets may greatly complicate raising equity financing, finding strategic or financial partners, or selling a business. This article will first deal with what is a non-core asset; why non-core assets may complicate a transaction; and what may be done about non-core assets.

What are non-core assets?

Non-core assets are assets that are not necessary for a company to carry on its business in the ordinary course. Examples of non-core assets owned by a manufacturing or service company might include:
  • Real estate that is lying idle, or generating passive investment income from third parties;
  • Shares or bonds that are not related to the company’s main line of business;
  • Subsidiaries or investments in other companies unrelated to the company’s core business;
Provided that the above assets are not required to create the liquidity necessary for the company to carry on its core business, these may be considered non-core assets.

Why non-core assets may complicate a transaction

There are two main reasons why non-core assets may complicate a transaction.

First, investors very often do not wish to purchase non-core assets when they are buying or investing into a company. A few such situations I have experienced in the past:
  • Investors in an energy company did not wish to purchase several residential building lots owned by the company;
  • Investors in another company did not with to purchase two cottages owned by the company.
  • A company that had two core businesses, construction and aerospace, was unable to attract investors into either core business until the two businesses were fully separated. In the first case, the owners of the company sold the building lots to family members of the owner just prior to closing of the sale of the company, triggering a significant capital gains tax and land transfer taxes. In the second case, the purchaser bought the company, essentially acquiring the cottages at a zero valuation. In the third case, quite over six months of restructuring were required to separate the two business lines, before offering them to investors, thereby delaying the company’s access to capital.

    The second complication has to do with valuation of the company in question. How should these non-core assets be valued? As demonstrated in the second example, non-core assets were sold at zero valuation, in order to avoid delaying the transaction. So valuing of non-core transaction really depends on the time frame in which a transaction is contemplated. The more time is given to spin out non-core assets, the more likely that the value of the non-core assets may be realized, and on a tax efficient basis.
What may be done about non-core assets?

An evaluation of what should be done with non-core asset should be part of any transaction planning or business exit planning exercise.

Whether an asset is core or non-core is often a question of judgment. For example, is an owner-occupied office building, warehouse, or plant core or non-core? This is often a judgment call.

I can’t emphasize enough the need to give this issue careful consideration well before a transaction is taken to market. I know one company in the food industry that has been on the market for over three years. Over a dozen investors have performed due diligence on this company, and they all backed out, primarily because the company-owned plant was located on highly priced downtown urban land, and the seller insisted on realizing full value. No company in the food business was willing to pay a premium for the development potential of this real estate. Such companies will either be “hard sells”, or an investor may buy such a company “on the cheap”, opportunistically unlocking the value of the non-core assets.

Remember, a privately held company is one of the most illiquid forms of investment imaginable. Keeping your company devoid of non-core assets is an important way of increasing liquidity.

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