Equipment Appraisal Blog | Understanding Machinery Appraisals

Image source: Compactor. (2023, April 10). In Wikipedia. https://en.wikipedia.org/wiki/Compactor

Whether you own a company or are invested in the business as a principal, financial institution, or related third party, there may come a time when you need to liquidate some or all of the assets associated with the operation. Liquidation is a somewhat more ominous word for resale, typically where there is an urgency to sell the assets or that those individuals involved are not in the business of selling equipment.

As an appraiser, we are asked about this issue quite often, regarding the best approach and realistically what to expect when entering these unfamiliar waters. No single answer covers every situation, however, there are guidelines that can assist the reseller/liquidator who lacks any prior experience in this area.

If your business is reducing operations, or shutting down altogether, and the company owns considerable equipment and personal property, it is important to plan for a liquidation far in advance, where personnel remains available to aid in maintaining the condition of the equipment and can assist in showing the machinery to purchasers.

This will provide opportunities to arrange for the sale of your assets ahead of the actual closure, and allow buyers to preview them while still in operation. In an ideal world, you could effectively sell the assets as part of an ongoing business enterprise, however, if the company can’t sustain profitability, a more realistic scenario would be to locate competitors and other end users who will pay fair market value, based on the machinery remaining in good operable condition until sold.

If neither of these options is feasible, then a comprehensive liquidation effort should take place to realize an orderly (private sale) or forced (auction) liquidation value in a timely fashion.

Communication and timeliness are crucial in a liquidation effort, as the longer it takes to formulate a game plan and ultimately sell the assets, the less value will be realized. If equipment has been neglected for months and begins to fall into poor condition, buyers will no longer be comfortable offering a fair price. It is critical that the assets continue to be maintained, even after they cease operating. Hiring a mechanic to start and run the equipment on a weekly or bi-monthly basis is important to maintaining the condition.

Hiring a private reseller or an auction company who can coordinate the sale of the assets is a good option to complete the liquidation. An experienced third party will oversee the resale effort, while managing the logistics of the sale, including the security of the location, completing minor repairs, and creating a marketing campaign. This will increase the odds of a successful disposition where you pay a commission based on the sale price.

Regardless of the scenario you face, it is important to plan ahead and spend the time and resources needed to maintain the condition of the equipment, leading to a successful outcome in an otherwise difficult situation.

In our last blog post, we discussed Fair Market Value and its translation in the resale marketplace. The example we used was the sale of a used vehicle (car, pickup, SUV). For this week’s post, we will discuss the two liquidation value premises using the same example.

As a refresher, here are the two premises of value and their ASA definitions:

Orderly Liquidation Value

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

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.

Orderly Liquidation Value would roughly translate to a trade-in value at your local dealership with the assumption that you are going to purchase another vehicle with that same dealer. There is enough incentive for the dealer to offer you a decent price given the new business aspect and the dealer’s need to make a profit margin on their ultimate resale of that asset.

The overall value and demand in the market for that particular vehicle will help determine how big that spread is. You will typically see a range of 20-40% between Fair Market Value and Orderly Liquidation depending on those factors. If a dealer has an immediate buyer for a high priced vehicle you are trading in, then the differential will be in the lower end of the range. If it is an older, less valuable vehicle with no resale timeline determined by the dealer, you can expect less of a trade in value in relation to the retail price.

Forced Liquidation Value, by its very definition, translates to an auction level which is generally considered the lowest value of a vehicle given the immediate need or compulsion to sell the vehicle as quickly as possible. You are essentially sacrificing dollars for time in these instances. The only lower levels of value used in appraisals are salvage (parts) and scrap.

The auction resale marketplace is very active in certain industries such as automobiles, trucks, trailers construction and standard metal working equipment. As a result, the levels of resale tend to be somewhat higher than if you were to try to auction equipment in a more confined industry with a limited number of potential buyers.

In summary, these different premises of value will produce a broad range of figures when considering all three in an appraisal assignment. Which ones are most appropriate for your business can be reviewed and discussed with an accredited appraiser prior to the actual valuation.

An ASA accredited equipment appraiser most often uses one or a combination of the following premises of value in their reports:

• Fair Market Value
• Orderly Liquidation Value
• Forced Liquidation Value

These terms are formally defined by the American Society of Appraisers (ASA) as follows:

Fair Market Value

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

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

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.

We are often asked how these definitions translate to the actual marketplace where the buying and selling occurs every day. To facilitate a response to this question, we will consider selling your used vehicle (car, pickup SUV) when it is determined you need to replace it. We will begin with the Fair Market Value premise.

Fair Market Value is considered the higher end of the value spectrum and can be considered comparable to a private party sale where you, as the owner of the vehicle, put an ad online or in a local paper in an attempt to sell to another private party. The key assumption here is that there is no immediate sense of having to sell or purchase and the sale is on an “as-is where is” basis with no warranty or other conditions of sale.

The ability to obtain Fair Market Value is more realistic if you are in the business of buying, selling, leasing or operating equipment in the applicable industry. That is why new and used equipment dealers will typically be a good source to best understand this “retail” level of value.

To summarize, fair market value while being an accepted level of pricing in an equipment resale effort, many businesses such as banks and other investors look to liquidation values as a more attainable figure in a typical resale scenario.

In our next blog post we will cover the two types of liquidation values as they relate to the sale of your used vehicle.

When you're considering filing bankruptcy for your business, of whatever type you select, you have a lot of decisions to make and a lot of information to sort through to make the best choices for your business' potential continuation. But what happens when your business goes bankrupt? What can you expect to happen with your business assets? Will the equipment you need be sold? During the process, an equipment appraiser is typically used to perform a machinery valuation on your business' equipment and will be required to follow strict guidelines and methodologies to ensure the that the process is equitable for all the creditors and the business itself if it is decided to remain in operation. Here are some details to help you along the way.

Filing for bankruptcy: What role will equipment values play?

When it comes to dealing with a bankrupt business, there are a number of different concepts and values that are commonly used in the process when it comes to asset and equipment valuation. Because a bankruptcy requires a court of law, there can be very specific requirements that must be met during the equipment appraisal process to ensure that the process is fair to all involved and the report accurate. There are many different situations where valuation will come into play during a bankruptcy:

• Liquidation is one of the most common types of valuation used in bankruptcy situations, because your creditors will almost always want to be paid in cash rather than in your equipment. Getting a liquidation value appraisal helps the court determine the net recovery that can come from the sale of your business assets.
• Bankruptcy code does allow for other types of valuation, however. Value in use, value in exchange, liquidation value, net realizable value or other standardized methodology may be used if directed by the bankruptcy court. These values can differ based on a wide range of other factors, so it's important to use a certified equipment appraiser with experience in bankruptcies to make sure the advisors in the process provide the right value context.
• Because a court is involved, the machinery appraiser may be required to review prior court cases to determine what the proper type of valuation should be to generate the final report. In particularly complex cases, the guidance of legal counsel may be required to determine which valuation methodology should be used in each unique situation.
• The judge may also have a say in the type of valuation being used in a business bankruptcy case. It's not unheard of for a bankruptcy court judge to require a specific type of valuation if the situation calls for it. This will limit the type of valuation that can be used in that instance.

Facing bankruptcy is a difficult task, but knowing what limitations may be involved in your case or the type of valuation to expect can make the process easier to anticipate. Knowing what to expect as the process goes forward makes it easier to deal with situations as they arise. If you're considering going through a business bankruptcy, you'll want to work with an equipment appraiser who can give you details on what's what with your company.

Imagine your business is deeply in debt. You can no longer afford to keep your doors open. You have existing inventory and assets, and you know that by selling these, you can repay some of your creditors. Yet the more pressure you have to sell your assets, the less you can command for them. To understand your options, it's essential you have an understanding of forced liquidation value. 

What is Forced Liquidation Value? 

Forced liquidation value provides a snapshot of your business in a state of crisis. An appraiser assumes you need to sell as fast as possible, which usually means at auction. Both the rush factor and the auction generally mean that you'll wind up accepting less for the piece of machinery (for example, an air compressor) than you would if you were in no rush to sell. 

By understanding forced liquidation value, you can understand where you stand, even when things are going poorly. The data that you receive from an appraiser can then help you decide your next steps. 

When performing a company valuation for assets, an appraiser will estimate that your items will sell at auction within a short time frame - say, 90 days or less. They will then add up the perceived value of all items sold via auction to arrive at the business's forced liquidation value. The forced liquidation value gives a minimum worth for the business, assuming the company can sell all assets at auction. 

To come up with an equipment valuation, the equipment appraiser must also make a series of assumptions about the auction process.  As a result of this series of assumptions, the estimated value is often a big difference from orderly liquidation value and even bigger difference from the fair market value where there is much more time to sell the equipment. 

When is Forced Liquidation Value a Good Idea? 

Machinery valuation via forced liquidation value usually works to a business's advantage when the company is in trouble and actually needs to get rid of machinery (like the air compressor) quickly. 

There is no reason for a healthy business to use forced liquidation value for equipment values, even if the company plans to sell an air compressor at an equipment auction. A healthy business could service or repair equipment before selling it at auction, whereas a company facing liquidation must sell the equipment in an as-is state. For the same air compressor, a company willing to service the equipment or wait for the right time to sell could command a significantly higher price than the company that needs to sell as-is equipment immediately. An exception may be the need to clear out the equipment so that a new line can be installed in the facility.

If you need equipment appraisals for any reason, it's important to find an appraiser who understands your industry and can accurately value your equipment. "Time to sell" is an important concept that needs to be understood and helps explain why an asset may sell for different values.