DEFINITION of 'Hard-To-Sell Asset'

An asset that is extremely difficult to dispose of either due to its inherent problems or market conditions. A hard-to-sell asset can take various forms - a factory or production facility for a manufacturer, 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 it has no choice but to dispose of it at a fire-sale price. The burden imposed by a hard-to-sell asset depends on its significance to the parent company; if it is of a significant size, it can drag down the market valuation of the entire company.

BREAKING DOWN 'Hard-To-Sell Asset'

A company that has a hard-to-sell asset is faced with a difficult choice with regard to keeping the asset operational, versus shutting 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 may arise due to inherent problems, for instance a mineral property with declining ore grades or a production facility that is located in a country where there is an upsurge in political risk. Hard-to-sell assets are more frequent when there is a bear market in a specific sector, or 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.

Hard-to-sell assets offer the potential for significant returns to a smart buyer over the long term, if the buyer can turnaround 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 these risks.

 

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