Creating High Value from Asset Dispositions

Spend Matters welcomes a guest post from Eric Narsolis, Erica Pak, Jared Hutchins, and Jeff Schlosser, with Alvarez & Marsal Business Consulting.

Asset disposition is becoming an increasingly strategic part of a company's inventory management process, as businesses look to unlock cash from surplus, obsolete, and/or scrap assets and aged inventory items that are often overlooked and insufficiently managed. As shown in Figure 1, growth rates of U.S. manufacturing inventory levels have grown over the past decade (from 2002 to 2012) almost four times compared to the previous decade. This is especially true in the refining, utility, steel and auto industries, where companies typically keep high value assets for longer periods of time, disregarding usability, functionality or need. These assets tie up working capital, drive higher warehouse operating costs, and incur indirect costs such as rent/lease, insurance and security services. Proactively reviewing aged inventory and auditing physical stock of equipment can help identify assets that are no longer needed and begin the disposition process. Selling these assets, which are often fully depreciated, can be a source of welcomed revenue that can be re-deployed for other value-add uses.

Figure 1 – US Manufacturing Inventory Levels (1992 through 2012)

The cornerstone to maximizing value through asset disposition is the overall approach, which begins with identifying and including key stakeholders, such as plant managers, engineering staff, maintenance, procurement and finance, in the review process. Early involvement of these personnel helps tackle resistance often present at the beginning of the identification phase and during the final stages.

Creating a detailed datasheet of an asset's specifications, including manufacturer, date of purchase, mechanical condition and usage hours, is also crucial and helps streamline the sales process and further maximize value. The most important initial activity is conducting a comprehensive strategic sourcing effort to identify a capable auctioneer, who has a breadth of experience in the respective industry and who can reach global customers, especially in emerging markets. Potential auctioneers should be thoroughly reviewed for their understanding of the items for sale and overall marketing strategy, as well as prior success in disposing similar assets.

In addition to auction sales, more complex asset disposition projects, which involve plant, process unit, or large equipment removal, may include demolition, environmental remediation, and scrap salvage. In these instances, a general contractor may be the best fit, particularly one that assumes all liability, manages the subcontractors and workflow sequence, and is aligned financially with the owner. Negotiation with service firms is crucial and should include requirements around net sales guarantees, net revenue sharing, cost transparency, audit-ability of removal process, and other key considerations. Once a firm is chosen, continuous project management is necessary to ensure safe, timely execution and financial success.

Finally, in some industrial situations, there may be significant interest on behalf of international and sovereign entities to purchase "turnkey" assets for relocation to foreign soil. Many of these situations can be a boon to the buyer (buying "used" is much less expensive than building new) and can allow a seller to divest an entire site (e.g., refinery) at one time. While more complicated than divesting a few assets or converting assets to scrap, this option is becoming increasingly prevalent.

Companies should be careful to avoid common pitfalls during the disposition process, such as:

  • Limited to no involvement of key stakeholders during asset review
  • Lack of rigorous analysis in determining whether to keep or sell high book value items. Evaluation should include assessment of lead times and alternate manufacturers
  • For large process or equipment sales, insufficient validation of the financial wherewithal of potential buyers
  • Limited understanding of environmental risks, removal process, and hidden costs
  • Limited understanding of the underlying scrap market/value at time of exercise
  • Inadequate vendor management during execution

In conclusion, it is important to proactively review unused assets and aged inventory items and monetize, wherever possible, "stale" working capital. Companies would be well served to assign an 'owner' to actively manage the disposition of these assets and to develop good working relationships with a supply base that can maximize the net sales proceeds.

- Eric Narsolis, Erica Pak, Jared Hutchins, and Jeff Schlosser, Alvarez & Marsal Business Consulting

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