The Seller must provide a full list of all the Business Assets included in the sale, fixtures and fitting, equipment, vehicles etc. with a value. But what value does one use? Is it the depreciated book value, the present replacement value, or an estimated forced sale price?
In fact, it is somewhere in between, call it the going concern value, an educated guess.
On one hand, we have high replacement value and on the other the forced sale situation. Let’s say a four-door filing cabinet would cost about R1 250 new. A good second hand one at an auction would cost about R450, but you would have to attend an auction and stand around for hours to bid. Then get a bakkie to transport to your office only to find that one draw doesn’t work. Therefore, the cabinet working in the office is worth more than all that pain, let say a secondhand value of at least R750. So, all the assets are treated on the same basis, a reasonable secondhand estimate.
You now need to ask the seller whether there are any items in the business that are not on the asset list. In other words, any equipment that is being removed and will not form part of the sale.
For example, A factory making metal components was exceptionally well equipped and making good profits. The seller was moving overseas and had provided the buyer with a full inventory list. On the day of take-over, the buyer was understandably shattered as the seller had removed an essential machine for making jigs with which components were produced. The seller pointed out that it was not on the inventory list but at no stage had he indicated that this piece of machinery would be removed and was excluded from the sale. The seller intended taking the machine overseas to set up a similar operation. In the end, the seller returned the machine, but it would have been disastrous to the business if it had been removed.
It is also important to verify that all items are paid for and not subject to any leases or HP agreements. If you take over any leases / HP’s, the value of these items should be reflected as the difference between the going concern value and the settlement value.
If you are not familiar with plant and machinery, have a person experienced with the equipment give it the once over. Older equipment may go on forever, but check that parts are still available because if it breaks you could have a major problem.
This is part of the series A-Z in Buying a Business by Mike Hindle of Affiliated Business Brokers