Same Profits, Different Risks: Why Asset Structure Changes Valuation

Introduction: Why Asset Structure Affects Business Valuation

When it comes to business valuation, a common oversight lies in treating asset-light and asset-heavy companies as equals. This article explores why that’s a mistake, and how to get it right.

Two companies. Same sector. Similar profitability. But one leases all its premises and equipment, while the other owns them outright. Despite these structural differences, both were assessed using the same valuation methods (not by us!). This kind of approach can misguide deal negotiations, distort risk assessment, and result in mispriced valuations.

IFRS 16 tried to bridge this gap by requiring lease liabilities to be brought onto the balance sheet. But it has also created distortions in key valuation metrics, especially EBITDA. In this article, we explain how and why valuation of asset-light vs asset-heavy businesses requires tailored thinking.

What Is the Difference Between Asset-Light and Asset-Heavy Businesses?

The difference lies in whether key operational infrastructure—such as offices, warehouses, showrooms, or machinery—is owned or leased.

• Asset-heavy businesses tie up capital in ownership, which provides control and stability.

• Asset-light businesses lease these same assets, offering flexibility and scalability, but at the cost of higher dependency.

These differences significantly affect cash flows, risk profiles, return metrics, and valuation methods.

Q&A: Valuing Asset-Light vs Asset-Heavy Businesses

Q1. Why is this distinction important in business valuation?

Because capital structure shapes risk, cash flow predictability, and returns. A company that owns its facilities has different capex cycles, financing needs, and renewal risks compared to one that leases. Valuing them the same way misses those key differences.

Q2. How does IFRS 16 impact EBITDA and valuation?

IFRS 16 reclassifies lease expenses as depreciation and interest—moving them below the EBITDA line. This inflates EBITDA for asset-light businesses, even though their actual cash flows haven’t changed. Unless adjusted, EV/EBITDA multiples can overstate their value.

Q3. Can you give a simplified illustration?

	Company A (Asset-Heavy)	Company B (Asset-Light)
Assets	Owns factory & offices (AED 20m)	Leases equivalent space (AED 2m/year)
Reported EBITDA (post-IFRS 16)	AED 4m	AED 4m (inflated)
Renewal Risk	Low	High
Capital Employed	High	Low

Valuing both at 10x EBITDA makes them appear equal, but that’s misleading. The economics differ. So should the valuation.

Q4. What adjustments should buyers make for asset-light companies?

1. Adjust EBITDA by reversing the IFRS 16 lease reclassification.

2. Treat the present value of committed lease obligations as debt.

3. Stress-test for rental escalations and lease renewal risk.

   
   

Q5. And for asset-heavy companies?

1. Split capex into maintenance and growth.

2. Evaluate asset utilisation and capital turnover.

3. Consider collateral value when assessing financing or exit.

   
   

Q6. Which valuation methods are most sensitive to asset profile?

Method	Asset-Light Focus	Asset-Heavy Focus
DCF	Lease renewals, escalation clauses	Capex cycles, asset longevity
EV/EBITDA	Must normalise EBITDA for IFRS 16	Reported EBITDA is more reliable
ROIC / ROE	High post-scale, but volatile early returns	Lower but more stable capital efficiency

Q7. What are some real-world examples of each model?

Sector	Asset-Heavy Example	Asset-Light Example
Manufacturing	Tata Steel – owns plants, mines	Nike – outsources production, leases logistics
Retail	Inditex (Zara) – owns stores, hubs	ASOS – online-only; leases fulfilment centres
Services	TCS – owns delivery campuses	Accenture – leases offices worldwide

These examples highlight how asset structure drives capital allocation, operating flexibility, and valuation metrics.

Q8. As a seller, how should I position my business?

• If asset-light: Showcase scalability and cost-efficiency, but be transparent about lease risks and renewal dependencies.

• If asset-heavy: Emphasise asset quality, operational control, and stable cash flows—but focus on the strategic value of assets, not just their book value.

Q9. As a buyer, what red flags should I watch for?

• Asset-light: Short lease terms, steep escalations, limited break options, or landlord dependency.

• Asset-heavy: Deferred maintenance, heavy capex coming due, or underutilised and non-core assets.

Q10. Bottom line?

Valuation isn’t one-size-fits-all. Adjust for accounting treatments like IFRS 16, understand how ownership vs leasing affects value, and always price based on the true economics of the business model, not just reported profits.

Ideal Capital Management Consultants advises mid-sized businesses and investors on transaction structuring, valuation, and corporate finance strategy across the GCC and India.