If your company is like most businesses, you may have noticed the familiar picture – some business assets that appear on the books are no longer around, while others that are being used all the time are not recorded.
When it comes time to pay business property taxes, it could make a difference as to what the actual business asset values are. Do not expect things to come out in the wash. Not to mention that the improper asset value reporting could land you in trouble with the assessor.
Book values of business assets represent the original cost less accumulated depreciation. For the purposes of business valuation, you need to figure out the fair market value of these assets as of the valuation date. Unfortunately, the accounting records do not represent the fair market or economic value of business assets either in use or in exchange as would be needed in an asset sale.
The depreciated cost of business assets is a decent way to go if you are dealing with low tech, slowly changing industries. If, on the other hand, the pace of technological innovation is fast, asset values are affected by obsolescence. Imagine using software that is 30 years old and has not been upgraded since it was purchased. Odds are there are vastly better software solutions available today taking advantage of the technology leaps that have occurred in the interim.
So even if the new software costs more money to acquire, it may offer your business great improvements in productivity, reduced labor costs, and functionality. Your old software may be more of a liability than a useful asset!
The difference between the book values and fair market values of business assets really counts in a couple of situations. One is the purchase price allocation when the business sells. The second is when getting a loan from a commercial lender.
Banks are interested in being repaid and have little inclination to take over your business. If you can’t pay off the loan, the bank would have to sell off business assets to recover the money. Needless to say, the business assets will be sold to the highest bidder at the fair market value in liquidation. The bidders could not care less about the book values. The fair market value is what captures the going rate in this situation.
If you run across conservative estimates of asset value by an experienced lender, it is because they often see the fair market values in liquidation way below the book values.