Deciding which assets can go
Frank Fazzari, managing partner of Fazzari and Partners accountants in Vaughan, Ont., says the process of choosing which assets to liquidate can be more challenging for small business owners, who may have less expensive equipment with a smaller footprint, such as vehicles or trailers.
“I don't think smaller entities, from my experience, are as methodical in determining what assets are of no use and what to dispose of,” Fazzari says. “A large organization might have a registry of all their assets and, as they go through it, they're more conscientious of capital allocation.”
Businesses of all sizes must do some thoughtful long-term forecasting, which can help you avoid hastily selling equipment that’s gathered dust since February 2020 — but may still have value in the years to come.
“I think those businesses that aren't desperate will take a longer view,” Fazzari says. “Those that can sustain themselves aren't panicking and are making rational decisions.”
Now may be a great time to sell
The pandemic’s negative effect on the global supply chain could help the equipment you sell fetch a higher price.
Spiking shipping rates, weeks-long backlogs at some of North America’s largest ports, and shortages of critical components, like semiconductors, mean that buyers who need the assets you’re looking to sell — or the material they’re made from — may be willing to pay above-market prices.
“Because prices are so high today on a lot of things, this might be the perfect excuse to look at your businesses and say, ‘What should I get rid of?’ Everybody's going through that process. And this is the time to do it,” Fazzari says.
When weighing the benefits of selling a business asset, leave room on the scale for tax implications. If you dispose of business materials and don’t replace them, you’ll owe taxes on the proceeds, cutting into your cash flow.
That applies to the property that houses your business, too. But if you replace it with a smaller building, replacement property rules can help you defer or avoid taxes on the sale proceeds.
If cash flow is tight but you’re still getting use out of your assets, you have the option to sell them and lease them back from their new owners.
“From the outside, nobody would know whether you own the equipment or you've leased it, right? It's just sitting in the same place. But it does allow better cash flow,” says Howard Wasserman, partner in the tax division of Segal LLP advisory firm in Toronto.
Trade it in
In some cases, trading in underused assets is more advantageous than selling them.
Exchanging old equipment helps you not only avoid the tax hit, but also may help your business pivot — without paying full market value — if the pandemic has set it on a new course.
“It's often convenient that way because the vendor of the new equipment will come in, pick up the old machine and put in the new one,” Fazzari says.
A trade-in likely will require negotiating because your assets may not have an easily accessible, Blue Book-type list of resale values to consult.
“Obviously, the vendor wants to give you the lowest value possible. And the buyer wants the highest amount possible,” Fazzari says, adding that wear and tear will factor into the negotiation.
If your equipment is not going to make itself useful in the next five years, it may be worth replacing.
“With the shortages of many, many products, this is a good time for owner-managers, especially private enterprise individuals, to walk down the shop, go into the yard and see if there's stuff in there that they’re not going to use,” Fazzari says.
Fine art as an investment
Stocks can be volatile, cryptos make big swings to either side, and even gold is not immune to the market’s ups and downs.
That’s why if you are looking for the ultimate hedge, it could be worthwhile to check out a real, but overlooked asset: fine art.
Contemporary artwork has outperformed the S&P 500 by a commanding 174% over the past 25 years, according to the Citi Global Art Market chart.
And it’s becoming a popular way to diversify because it’s a real physical asset with little correlation to the stock market.
On a scale of -1 to +1, with 0 representing no link at all, Citi found the correlation between contemporary art and the S&P 500 was just 0.12 during the past 25 years.
Earlier this year, Bank of America investment chief Michael Harnett singled out artwork as a sharp way to outperform over the next decade — due largely to the asset’s track record as an inflation hedge.
Investing in art by the likes of Banksy and Andy Warhol used to be an option only for the ultrarich. But with a new investing platform, you can invest in iconic artworks just like Jeff Bezos and Bill Gates do.