Sometimes your assets are worth more separately than together.
To determine whether your business is worth more as a whole or in parts, compare two things: what it generates when operating as a whole, and the sum of what you would get from each asset if you sold, leased, or licensed it minus the cost of doing so. If the former is greater, it makes sense to keep the business intact; but if the latter is greater, the question shifts from how to operate more effectively to what to do with each asset.
This question becomes relevant before a reorganization, spin-off, or sale. The natural starting point is that the business is worth more as a whole, and that may be true, although there are cases where the comparison shows that a particular asset is worth more than what it currently contributes to the business. Comparing the two possibilities provides more information to help you decide.
Here we explain how to make that comparison, what signs indicate that it’s worth doing, and what you need to review before making a decision.
There are two ways to look at the same business. The first views the assets as working together: their value is the cash flow generated by the business. The second examines the value each asset would contribute on its own whether in its current use, in another use, leased, or licensed minus the cost of operating it independently.
Both approaches are valid, but they answer different questions, and their relative importance depends on the decision you’re going to make.
| Entire Business | Separate assets | |
| The question it answers | How much does my business generate as it currently operates? | How much would each asset contribute on its own, after deducting the cost of operating it independently? |
| When to Use It | When you’re considering keeping the business as is, investing in it, or growing it | When you’re considering reorganizing, spinning off a product line, a plant, or a brand from the rest, or selling. |
| What to Keep in Mind | Ensure that the assets continue to work together. | The other possible uses for each asset, the market, and its constraints |
The comparison is simple; let’s take two values:
F: the cashflow generated by the business operating as a whole, measured at present value
S is the sum of what each asset would contribute on its own, minus the cost of operating it independently. That cost includes what it currently shares with the rest of the business, such as personnel, services, and administration.
With these values, there are two scenarios:
If F is greater than S, it makes sense to keep the business together. On the other hand, if S is greater than F, it’s worth reviewing whether any asset or line of business is affecting the value of the whole.
What’s reducing that cash flow could be a specific component: an unprofitable line of business, a plant operating below capacity, or a brand that can no longer command its price.
In these cases, the other assets could perform better without that component or under a different organizational structure.
Accounting uses a similar comparison when assessing whether an asset has lost value. , IAS 36, defines recoverable amount as the higher of two amounts: fair value less costs to sell or its value in use that is, the value of continuing to use it where the former is a market reference and does not assume that a sale is in progress. When the cash flow of an individual asset cannot be measured, it is measured for the smallest group of assets that generates largely independent cash flows.
Two clarifications. Fair value is measured based on the market and does not reflect what an asset is worth to a particular company (NIF B-17 in Mexico, and IFRS 13, the international standard on fair value). Furthermore, whether an asset is measured as an individual asset or as part of a group depends on the unit of account established by the applicable standard.
Best use is also a factor. An asset may yield less from its current use than from another use, such as a property that is not being fully utilized (NIF B-17 in Mexico, and IFRS 13 internationally).
Let’s look at an example:
A group has three business lines. Two generate stable cash flow. The third operates a plant running below capacity and has a brand that no longer commands a premium price.
When viewed as a whole, the group’s cash flow falls short of what the first two lines would add up to, plus what the plant and the brand would contribute on their own (the plant repurposed and the brand licensed), minus the cost of operating them separately.
With that comparison, the conversation shifts it’s no longer about how to improve the third line but rather what to do with the assets: keep them together, reallocate them, or separate them.
These four questions structure the review and indicate which area of the company holds the answer.
| Question | Who answers | Who is responsible |
| What cash flow does each business line generate, and which ones cannot be separated? | Results by line and criteria for allocating shared costs | Finance |
| What would each asset contribute on its own, minus the cost of operating it alone? | Benchmark values by asset, comparable rents, or licenses | Finance and Operations |
| What restrictions does each asset have? | Contracts, encumbrances, transfer conditions, and permits | Legal |
| How much of the cash flow depends on the assets remaining together? | Operational dependencies, such as one plant supplying another or a brand covering multiple products | Operations |
If the cash flow depends on the assets remaining together, the business takes precedence; otherwise, each can be reviewed separately.
Is the value of a business always the sum of its assets?
No. It depends on the cash flow the business generates when operating as a whole, which may be greater or less than what its assets would yield separately.
What is a cash-generating unit, and why does it matter?
It is the smallest group of assets that generates cash inflows largely independent of those from other assets or groups. It matters because, when the cash flow from an isolated asset cannot be measured, the impairment standard assesses it at the level of that group.
Why does accounting compare two values when assessing impairment?
Because an asset’s value can be measured in two ways: by what it contributes through continued use and by its market value. The standard uses the higher of value in use and fair value less costs to sell.
Does this comparison require any changes to be made?
No, it is a preliminary review prior to making a decision. Whether to keep the assets together, reallocate them, or separate them are subsequent decisions that depend on the results of the comparison.