Equipment Appraisal Blog | Understanding Machinery Appraisals

As appraisers, we are at times asked to estimate orderly liquidation value on a "net" basis, which adds an anticipated cost or expense element to the conclusion. These requests most frequently come from banks and other financial institutions that are not in the business of buying and selling equipment. Their goal is to make a sound credit decision, based in part on a collateral review for a loan or lease, while including a more conservative worst-case scenario, where they would need to recover the equipment and sell it at a future point in time. This might occur in a customer default and repossession situation, bankruptcy, or an end-of-lease return scenario.

For a refresher, here is the formal definition of Orderly Liquidation Value from the American Society of Appraisers (ASA):

Orderly Liquidation Value is an opinion of the gross amount, expressed in terms of money, that typically could be realized from a liquidation sale, given a reasonable period of time to find a purchaser (or purchasers), with the seller being compelled to sell on an as-is, where-is basis, as of a specific date.

This estimate is considered a "gross" amount, meaning that it excludes any associated costs of sale that may occur during the period leading up to and associated with the transaction. This is where the "net" component comes into play.

Net Orderly Liquidation Value will consider common expenses associated with a sale. These could include recovery costs such as dismantling, rigging, and shipping; short-term storage; marketing/advertising; and broker fees/commissions. Depending on each specific scenario, these expenses will vary, and some may or may not be applicable. For instance, the size and type of equipment and whether you can keep the machinery at its present location during the marketing period, are large factors pertaining to the removal costs. Leasing companies will often require their customers to return the equipment at their expense during the end of lease stages, while alternatively, in bankruptcy, the bank may need to arrange and pay for this themselves.

To that end, the appraiser will subjectively make reasonable assumptions as to what the average costs may be, in a hypothetical situation, based on their experience. They may determine the focus should be on storage and selling costs, which are more consistent and likely to occur in any situation. Either way, estimating net orderly liquidation value first requires a determination of the gross value, and then applying a reasonable percentage or dollar reduction to that figure, in order to arrive at a final conclusion. Some of the third-party sources relied upon in the normal course of the appraisal can likely assist the appraiser with this calculation.

Complete independence is something most of us long for when it comes to living our lives. Although the definition in this context is somewhat different as compared to independence in a business transaction, the same level of importance applies to the term. Without independence in business, there exists the possibility that one or more parties involved may be making decisions or influencing those who make them in order to attain a desired result.

When value is part of the equation in a transaction, the stakes are even higher, and the risks involved are much greater. Value equals money and we all know how money can drive a lot of poor decisions.

With that idea in mind, it brings us to the concept of an independent and unbiased appraisal. Believe it or not, it was only around 35 years ago that federal and state regulators began mandating that all independent appraisers become certified, accredited, and/or licensed to become qualified. Before that time, many appraisers were not governed by these rules, which essentially means they had no official oversight. Thus, their independence, as well as the formal knowledge and understanding of how to complete an unbiased third-party valuation were not evident.

Since that time, appraisal foundations that were already in existence began to prosper, allowing for expanded oversight as well as the creation of more formal educational and experience requirements for appraisers. Formal standards of professional appraisal practice become more entrenched into the process that formally certifies and accredits valuation experts.

These changes were welcomed by banks, insurance companies, investors, and business owners, as there was now a high level of confidence that their transactions would include a fully independent assessment of value with the associated companies and their underlying assets, such as real estate, machinery & equipment, and intangibles.

The additional costs associated with these fully independent appraisals were outweighed by the added benefits, as the risk of any possible bias in their deals was significantly reduced.

In summary, there are still companies out there who claim to be appraisal experts but do not hold the required certifications or licenses needed to comply with all the regulations currently in place. Ensure that you don’t engage with any business or individual who is not accredited by a reputable appraisal association as they are not governed under these rules of independence.