Equipment Appraisal Blog | Understanding Machinery Appraisals

How do Banks and Leasing Companies Measure Equipment Value?

Posted by Equipment Appraisal Services on Mon, May 17, 2021 @ 08:00 AM

Equipment Appraisal Financing Leasing

In a recent blog post in early May, we talked about the many reasons a company will need to obtain an updated equipment appraisal to get the most out of a business goal or requirement. One of the primary issues we discussed pertained to traditional bank financing and equipment leasing.

The next step in understanding how these appraisals can work best for your business, we will need to see through the eyes of your bank and leasing company as they determine the right level of value to consider when making investment decisions.

Here are the most commonly utilized values and their American Society of Appraisers (ASA) definitions.

Fair Market Value (FMV)

Fair Market Value is an opinion expressed in terms of money, at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts, as of a specific date.

Orderly Liquidation Value (OLV)

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.

Forced Liquidation Value (FLV)

Forced Liquidation Value is an opinion of the gross amount, expressed in terms of money, that typically could be realized from a properly advertised and conducted public auction, with the seller being compelled to sell with a sense of immediacy on an as-is, where-is basis, as of a specific date.

When any type of financing or leasing is involved, these parties may independently determine which value they would prefer to weigh, and in many cases, they look at all three. Every private and government-owned (ex.: SBA) financial institution has its own internal policies to abide by. What we most commonly see when appraisals pertain to bank financing is that Orderly Liquidation Value tends to be the primary focus. A lot of banks also have percentage tables they are willing to lend from, such as 70% of Fair Market Value or 80% of Orderly Liquidation, for example.

Equipment leasing companies may take a slightly more aggressive stance on valuing machinery & equipment as they are technically the owners of the assets and may have more extensive experience and knowledge in certain industries. A “sale-leaseback” is a common term where the business purchases your assets and leases them back to you under a monthly rental payment plan. This sale may be completed at Fair Market Value and, to offset their potential investment risk, they might collect a security deposit or similar resource as “additional collateral” in the transaction. Any sale back to the business at the end of the lease term is almost always at Fair Market Value.

In any of these cases, I would suggest having the appraiser estimate both FMV & OLV and try to avoid FLV, as this value is akin to an auction, which is at a lower value level, and doesn’t pertain to an ongoing business where your machinery & equipment is hard at work. And as always, ensure the appraiser you hire is accredited by the ASA.

Tags: equipment leasing, equipment valuation, Machinery & Equipment Appraisals, financing