Surplus Assets in Business Valuations
- Arnold Shields
- Jan 18, 2010
- 3 min read
Updated: Jun 23
In business valuation, not all company assets are created equal. Some contribute to business operations, while others do not. These are known as surplus assets, and they can significantly influence your valuation outcome.
What Are Surplus Assets?
Surplus assets are assets held by a company that are not essential to the day-to-day operations of the business. These may include:
Commercial or residential property not used in the business
Investments in listed shares
Excess or idle cash
Loans to related or unrelated entities
Collectables or luxury items (e.g. prestige cars)
Over time, many privately held companies reinvest retained earnings into such assets. While they may offer returns, they are not tied to the core income-generating functions of the business.
Business Value vs Company Value
It’s crucial to distinguish between the value of the business and the value of the company.
Business value reflects the earnings and performance of operations essential to generating profit.
Company value includes business value plus any surplus assets (and less any financing liabilities).
This distinction becomes especially important in shareholder disputes, family law matters, restructures, and tax compliance.
Revaluing the Balance Sheet: From Book Value to Market Value
When we undertake a business valuation, we restate the balance sheet at market value. This means:
Adjusting the value of all assets and liabilities to reflect current market conditions, not historical costs.
Classifying assets and liabilities into three categories:
Business Assets and Liabilities: Core operating assets (e.g. plant, equipment, stock).
Surplus Assets and Liabilities: Not required for operations.
Financing Liabilities: Loans or obligations related to funding the business.
Why Surplus Assets Are Treated Separately
The reason we exclude surplus assets from the core business valuation is to avoid mixing return rates and applying inconsistent capitalisation multiples.
For example:
A commercial property might be capitalised at 8–10%.
Cash deposits at 4.5%.
A profitable small business might be valued using a capitalisation rate of 20–50%.
If we include surplus assets in the business valuation, we risk distorting goodwill and applying valuation metrics inappropriately.
Adjusting Future Maintainable Earnings (FME)
Once surplus assets are removed from the business valuation, it’s critical to adjust the Future Maintainable Earnings to ensure consistency:
Remove expenses associated with surplus assets, such as property maintenance or interest on related-party loans.
Add back income from investments, dividends, or excess cash, unless they’re essential to the business.
This results in a clearer, more defendable valuation that accurately separates operational performance from capital allocation.
Key Takeaway
Surplus assets do not contribute to the operational performance of a business and must be treated separately during a valuation. Failing to make these adjustments can inflate or distort the true value of the business.
Whether you're preparing for litigation, shareholder restructuring or sale, recognising surplus assets ensures your business valuation reflects reality, not confusion.
Disclaimer:
The information provided in this article is general in nature and does not constitute personal financial, legal or tax advice. While every effort has been made to ensure the accuracy of this content at the time of publication, tax laws and regulations may change, and individual circumstances vary. Dolman Bateman accepts no responsibility or liability for any loss or damage incurred as a result of acting on or relying upon any of the information contained herein. You should seek professional advice tailored to your specific situation before making any financial or tax decision.
