What are Non-Operating Assets? How do they Affect Value?

From a business valuation perspective, non-operating assets (often referred to as “redundant” assets) are assets owned by a company, but not used in the day-to-day operations of the business. Common redundant assets include cash, marketable securities, loans receivable, unutilized equipment and vacant land. The identification of non-operating assets is an important step in the valuation process as these are often overlooked when the business is being valued based upon its earnings potential. The capitalization of earnings/cash flow approach does not capture the value of redundant assets. These assets must be valued separately and added to the value of the business otherwise determined.

Consider, for example, a company which owns a parcel of land (with an assumed value of $500,000) that is being held for future development or expansion. At the valuation date the land is not being used in the business. Using an earnings-based approach the company was valued at $2,000,000. However, because the land is not contributing to the company’s earnings, its value is not captured in the earnings based valuation approach. In fact, the vacant land likely is reducing the company’s earnings due to the property taxes that are being paid on the land therefore reducing the value of the company otherwise determined. These property taxes should be added back in determining maintainable earnings and the $500,000 value of the land (net of applicable taxes and disposal costs) should be added to the earnings value of the business. This same analysis also applies to cash, marketable securities or loans receivable.