Hard-To-Sell Asset: What It Is, How It Works

What Is a Hard-to-Sell Asset?

Hard-to-sell asset refers to an asset that is extremely difficult for a company to dispose of either due to the asset’s inherent problems or as a result of market conditions. Companies that try to sell hard-to-sell assets are often struggling financially, or the asset is no longer functioning at an optimal level. However, hard-to-sell assets can be lucrative, buying opportunities for some investors.

Understanding a Hard-to-Sell Asset

Companies purchase assets so that they can be used to generate revenue over the life of the asset, called its useful life. Assets can be tangible, or physical, and intangible, or non-physical assets like copyrights or patents. Fixed assets, such as property, plant, and equipment (PP&E) usually involve a significant amount of capital investment. Fixed assets are long-term assets that are designed to generate revenue for a company over many years.

Over time, many assets depreciate in value and eventually generate less revenue for a company. A company's assets can also become impaired, meaning the revenue or cash flow generated from the asset is less than the value of the asset recorded on the company's financial statements. An asset can become impaired due to a lack of consumer demand for the company's products or due to the deteriorating condition of the asset. Assets can also become impaired or obsolete due to technological advancements in the marketplace.

A company may need to write down a portion of the value of the asset, which is a reduction of the asset's value on the company's financial statements. A write-down is typically listed as an impairment loss on a company's income statement. As a result, assets can be hard to sell for companies and lead to complications when reporting the company's financial statements.

For example, banks that lend money to companies monitor the company's financial statements to ensure that there's enough revenue. Any losses from the sale of fixed assets would lead to a loss or a reduction in a company's profit or net income.

Selling Hard-to-Sell Assets

Assets can be sold for various reasons, including when the asset is no longer useful or profitable, or the company is struggling financially and is strapped for cash. A hard-to-sell asset can take various forms, such as a problematic property for a resource company, or even an entire struggling division of a large firm.

A hard-to-sell asset poses a difficult choice for a company weighing whether or not to keep the asset operational or shut it down. While keeping the asset running may incur continued operational losses, closing it down may result in a substantial decline in its value, partly because of the costs involved to restart it.

A hard-to-sell asset may impose a growing burden on the parent company until the company has no choice but to dispose of it at a fire sale, or heavily discounted price. The burden imposed by a hard-to-sell asset depends on its significance to the parent company. If the hard-to-sell asset is of significant size, it can drag down the market valuation of the entire company. A company's market valuation is a company's net income divided by its outstanding equity shares and represents how much profit the company generates from its assets.

Buying Hard-to-Sell Assets for Profit

Many private equity firms specialize in buying hard-to-sell assets at bargain prices in difficult markets. Private equity involves capital from private investors that directly invest in private companies. These investments are not listed on a public exchange. Private equity (PE) firms might buy a division or perform a buyout of a publicly-traded company.

Distressed Funding

Hard-to-sell-assets are often prone to vulture financing, which is a form of distressing funding, which involves investing companies that are struggling financially—or in financial distress. The underperforming divisions and assets are purchased by the PE firm at rock-bottom prices. Hard-to-sell assets that are purchased by PE firms can include real estate, physical assets such as machinery, technology, intellectual property, patents, and business units.

The goal is to turn the business operations around and then cash out either through an outright sale or an initial public offering (IPO), which is a stock issuance for a newly-listed company. As a result, hard-to-sell assets can offer the potential for significant returns to a savvy investor provided the buyer can improve the asset or turn around its operations.

Risk vs. Reward

Of course, there are risks that the hard-to-sell assets won't be able to be resold for a profit. However, despite the risks, huge returns on equity that can be realized from a successful exit strategy more than compensate the firm for the risks.

Similarly, fire sales can offer positive financial opportunities for investors, although these purchases can also be challenging. When it comes to fire sales of stocks, a highly discounted price could indicate the overall market sentiment is spiraling downward.

Examples of Hard-to-Sell Assets

Below are some common examples of hard-to-sell assets and why it can be so challenging for companies to divest these assets.

Hard-to-sell assets can be the result of inherent problems, for instance, a mineral property with declining ore grades or a production facility that is located in a country experiencing an upsurge in political risk.

Hard-to-sell assets more frequently occur when underlying business conditions are dismal. For example, an energy company may have a difficult time selling oil properties that do not have prolific output if the price of crude oil has plunged in the preceding months.

A business owner might want to sell the company, but the business itself can be a hard-to-sell asset. If the market value of the building and property has fallen significantly below its original purchase price, called historical cost, the company can run into difficulty selling the business. Likewise, companies also find it difficult to divest struggling divisions during recessionary times, as the number of interested buyers is greatly reduced.