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.

A hard-to-sell asset can take various forms, such as a problematic property for a resource company, or even an entire struggling division for a large firm. 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 a significant size, it can drag down the market valuation of the entire company.

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.

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. Likewise, companies also find it difficult to divest struggling divisions during recessionary times, as the number of interested buyers is greatly reduced.

Over the long term, hard-to-sell assets can offer the potential for significant returns to a smart buyer, if the buyer can turn around its operations. Many private equity firms specialize in buying hard-to-sell assets at bargain prices in difficult markets, turning their operations around over a number of years, and then cashing out either through an outright sale or a public offering. While there are risks involved in buying such assets, the huge returns on equity that accrue from a successful exit strategy more than make up 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.