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Home : Articles : Investment Recovery : Investment Recovery

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INVESTMENT RECOVERY

Investment Recovery Overview

by Glenn Wheaton, August 15, 2008

Investment recovery, also called asset recovery or resource recovery, is the process of recouping the value of unused or end of life assets through effective reuse or divestment. Organizations of all types and sizes practice some form of investment recovery. However, larger organizations that have more equipment, operating locations, employees, or assets often have the greatest opportunities to reap benefits by implementing investment recovery best practices. This is because larger companies have many more idle assets and consequently, more opportunities to generate savings through efficient processes.

There are several important components to effective investment recovery. These include idle asset identification, asset redeployment, and divestment. There are a large number of other processes that fall under each of these areas. The sections below will outline the main areas of investment recovery and will provide a brief introduction to these areas. We will also discuss some of the benefits that can accrue to the organization for having effective processes in place to manage these important functions.

Idle Asset Identification

One of the most important parts of the investment recovery process is the identification idle assets. There are many hidden costs that are associated with carrying idle assets. First, if a piece of equipment works, it could be put to better use somewhere else. Second, unused equipment depreciates in value and results in an actual expense on the books. Third, there are very real storage costs for holding and storing equipment and materials. These include rent, storage costs, and loss of space that could be used for other more productive activities. Fourth, idle equipment represents capital that is tied up and is not earning a return on investment. This is a very real loss, but is often a loss that managers fail to account for. Finally, if an idle asset is sold, it could provide an immediate cash benefit to the business.

For some organizations, identifying an idle asset may be quite difficult. Especially if idle assets are located in another geographic area and are under control of another person, group, or operating entity. In some cases, the entity controlling these assets may not have an incentive to have them labeled as idle. When identifying an asset, it is important to obtain as many details about the asset as possible. This may include model number, serial number, manufacturer, or other information. It also includes assessing the condition of the asset and determining if it can still be used productively. It can also involve taking pictures of the asset or following another standard asset cataloging procedures.

Redeployment

Redeploying an idle asset to another part of an organization is one of the best and most cost effective things an investment recovery professional can do with an idle asset. Redeploying an asset to another part of an organization removes an asset from the idle category and also saves the organization money by eliminating the need to purchase a new asset at current market rates. In order for an asset to be reused internally, another part of the company needs to have a need for an asset of that type. It must also be practical for the asset to be transferred and deployed at the new location. Finally, reusing an asset at the new location should also produce a benefit that exceeds the cost of purchasing a new item.

Divestment

In the event that an idle asset can not be redeployed, it should be quickly sold, scrapped, recycled, donated, or disposed. Correctly using these divestment processes maximizes the value of the asset for the organization. By effectively divesting the asset, the organization can quickly obtain cash that can then be used to invest back into the business. In addition, a successful divestment provides a significant (and often unexpected boost) to the organization's bottom line. This is because asset sales and scrapped equipment are usually booked as revenue to the organization. Donations can also provide goodwill and a tax benefit.

There are many ways to divest an asset. The method of divestment will depend on several factors: the condition of the asset, the fair market value, the number of prospective buyers, the complexity of the asset, the book value of the item, and whether the asset has hazardous materials or components. The best method is the method that provides the highest value / benefit for the organization, has the lowest divestment costs, and still complies with the organization's divestment policies. The optimal method often can be difficult to determine but understanding the options available will usually make the decision easier. The sections below will elaborate on divestment options like asset sales, scrapping / recycling an asset, donating an asset, and asset disposals.

Asset Sale

Once the decision has been made to sell an asset, an investment recovery professional next needs to decide how to sell the asset. This is not as simple as it might first appear. There are many ways to sell an asset that range from a fixed price sale, private sale, negotiated sale, auction, sealed bid, consignment, or outsourced sale.

Fixed Price Sale

Fixed price sale is often the easiest sale to make for an investment recovery professional. The asset is listed for a specific price and if the buyer likes the price, the buyer will purchase it.

Private Sale

Private sales are usually appropriate for more sensitive assets or branded inventory. In this case, the investment recovery professional does not want to make the items available to the public so may arrange to sell the item to a broker or offer the item to a small, select group of buyers. There will usually be additional terms and conditions that will apply to this sale due to the sensitive nature of the asset.

Negotiated Sale

In a negotiated sale, the investment recovery professional negotiates with a group of buyers to find out which one of them will pay the most. This usually involves getting multiple offers, comparing them, and selecting the best one. This can be a time consuming and lengthy process.

Auction

An auction can be a cost effective way to sell assets or inventory and can be a great way to discover the price of an item. Auctions work well when there are several buyers for an item. By placing successive competitive bids, the price is increases until the auction ends. Auctions are also appropriate when the value of an item is not known to the seller. Auctions can be conducted off line in an oral outcry format, or can be conducted on line in an automated format.

Sealed Bid

The sealed bid process, while similar to an auction, involved taking one "last and best" offer from prospective buyers. This can work quite well for selling an item and like an auction, ensures a fair and transparent process. However, there is no means of price discovery so participants can not raise their bids in response to the bids of others.

Consignment

Another way to sell an item is to consign it to a third party and have that third party sell the item. Third parties that specialize in selling items often have a list of qualified buyers and are better prepared to conduct the sale. This is an effective time saving device for the investment recovery professional. However, this can also result in additional costs on the sale. Many consignment companies charge 10 to 15% of the sale price to conduct these specialized asset sales.

Outsourced

Some companies also use outsourcers to sell assets or equipment. This is different from consignment because the outsourcer does not necessarily take ownership of the equipment. Instead the outsourcer will sell all the items and perform any needed demolition work or other services for a fixed price or for time and materials. This can be helpful when an asset is large, complex, unwieldy, or requires special expertise to prepare to sell like a plant or oil rig. Outsourced sale services do entail significant costs.

Scrap / Recycle

Another important method of divestment is scrapping or recycling. Most investment recovery professionals use this option quite frequently. After the identification process has been completed for a piece of equipment, it may become obvious that the equipment can not be reused or resold. The only option for the piece of equipment is to sell it for scrap value. If the equipment is made of a valuable metal and does not contain hazardous materials, it would likely have significant value based on the value of the metals. In this case, a scrap company that specializes in recycling old metals would pay a certain amount per pound for the piece of equipment. This amount would be based on the type of metal it is composed of and the current market value for that metal.

Donation

Donation is an option that is not used as frequently by investment recovery professionals. This is because making a donation can be a more time consuming process since it can take a while to find an entity qualified and willing to receive a donation. It can also require a lot of record keeping and interactions regarding the tax consequences of the transaction. Nevertheless, an effective donation can provide great benefits to the donating organization. It provides a tax savings for the donated equipment. It also builds goodwill for the organization when the donations go to a worthy cause that is recognized by the surrounding community. Donations also help the receiving organization since that organization has a great need for the equipment.

Disposal

In some circumstances, an asset can not be reused or sold to another party. In these cases, the asset will need to be disposed. Assets can fit into the disposal category if they are hazardous materials and need special environmental treatment. For example, many electronics contain hazardous materials and need to undergo a special process in order to make them safe for landfills. Other assets may be of such a sensitive nature that a company can not afford to have the asset fall into competitors hands. Still other assets may be attached to a property or can be part of a plant and may need to be removed in order to be disposed.

There can be significant costs associated with the asset disposal process. Hazardous materials may need to be treated extensively before they can be regarded as safe for a landfill. These treatments are not cheap and often involve the use of hazardous materials experts. Other sensitive items may need to be disposed of by a company that will dismantle a piece of machinery and destroy it to prevent it from falling into a competitor's hands. This can involve using a certified disposal company. Finally, for some property and equipment, the services of a demolition company may be required. This can be a costly process and involve special machinery, tools, and people.

Internal Procedures and Management

The main processes of idle asset identification, redeployment, and divestment are the what investment recovery professionals spend much of their time doing. However, in order for these processes to be effective, the company must have some basic procedures and systems in place to manage these processes and help make them successful. For idle assets, it is important to be able to track them, know where to find them, and to know which part of the organization they belong. For redeployments, the company must have a way to let other parts of the organization know about idle assets and have an easy way to request these assets for use in their operations. The divestment process requires that companies maintain an active pool of prospective buyers and know how to contact these buyers. It also requires that companies have effective ordering and invoicing systems, accounting tools, and tax tracking abilities. It is helpful to have the information from these processes located in one place.

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