Valuation of specialized assets is among the hardest tasks a business appraiser may undertake. Just about all businesses have such assets on hand. Imagine a technology company with specialized lab space and equipment. Or a manufacturing firm with its own set of machinery and factory floor layout. In each case the managers have adapted the business assets to their highest and best use for the company.
Yet the question of valuing such special assets plagues many business valuations when the intended use of the assets going forward is about to change. What happens to the value of a real property currently occupied by a restaurant if the new owners decide to put in a retail operation in its place?
Clearly, there are going to be some conversion costs associated with the makeover. Business buyers may figure this into their acquisition proposal to make sure the net value is positive. On the other hand, the seller may feel the offer falls below expectation.
The key point to remember is that the value of such business assets depends on their intended use and must be compared to alternative assets available. If the costs of converting the subject property are higher than suitable alternatives, a rational business investor would elect to go with the “plan B”.
Assets that cannot be substituted
Notice that this thinking is in sharp contrast to the situation involving unique assets available in the arts market. If a work of art comes up for sale chances are there is no way you can get an alternative. If the buyer really wants the painting, it is down to his ability to negotiate with the seller.
Alternatives to business assets dictate their value
In the business world alternatives always exist. The next best real property or business equipment is likely to be only marginally different from the target asset. In other words, you as the business appraiser can always make the assumption that one business asset can be substituted for another. As a result, you can determine the value of a business asset on the fair market value basis.