Equipment Appraisal Blog | Understanding Machinery Appraisals

What Do the Premises of Value Mean in the Resale Marketplace?

Posted by Equipment Appraisal Services on Mon, Oct 19, 2020 @ 08:00 AM

used-cars-premise-of-value

 

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.

Tags: forced liquidation value, orderly liquidation value, Premise of Value

What Do the Premises of Value Mean in the Resale Marketplace?

Posted by Equipment Appraisal Services on Mon, Oct 05, 2020 @ 08:00 AM

premise-of-values

 

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.

Tags: fair market value, forced liquidation value, orderly liquidation value, Premise of Value

Understanding Orderly Liquidation Value in your Equipment

Posted by Equipment Appraisal Services on Tue, Apr 04, 2017 @ 03:21 PM

understanding orderly liquidation value.jpg

Understanding orderly liquidation value in your equipment is just something most business owners never consider. Why? In general, liquidation is considered by most business owners to be a sign of failure, such as a bankruptcy liquidation. But there are a number of circumstances in which you may need to have an equipment appraiser perform a liquidation machinery valuation that have nothing to do with financial trouble in your business. In this post, we'll take a look at which circumstances may call for orderly liquidation equipment values and why this type of appraisal is used in those situations.

How businesses work: understanding orderly liquidation value in your equipment

What is orderly liquidation value?

Orderly liquidation value falls between forced liquidation value and fair market value in terms of monetary compensation. It's calculated under the assumption that the piece of equipment or machinery must be sold, but that there is a longer period of time to do so, such as a few months. You would receive less than you would at fair market value, but receive more than you would under a forced liquidation.

How is it different than fair market value?

Fair market value assumes that the equipment would fall under normal exposure in the market place before being sold for what is perceived as a fair price to both the buyer and seller. There's no serious time limit on how long the equipment would be offered for sale, so it would be sold for a higher price than in an orderly liquidation scenario.

How can orderly liquidation equipment values impact my business?

When you're getting ready to sell a business, knowing the orderly liquidation values allows you to gain quick cash to help with financing or to provide an additional buffer during the sale process if things don't go as smoothly as you'd like. When you're purchasing a business, knowing these values allows you to relatively quickly sell some of the excess equipment to pay down debts or meet other needs during the process. 

In what kind of situations is orderly liquidation value used?

In many circumstances, people involved in a business need to receive money relatively quickly for a number of reasons, but are willing to wait a reasonable amount of time to ensure they're getting more from the sale of that asset than they would through a forced liquidation. This can include the breakup of a partnership, the dissolution of a marriage where both individuals were involved in the business, the sale of excess equipment in anticipation of closing a business sale, an unexpected death of a business partner or similar scenarios. By providing additional time, the party that is leaving the business or their heirs will then receive money for the equipment that is sold without having to either lose out on the machine's value through a quick sale or wait a long period of time for it to sell using conventional methods and fair market value.  Banks also often lend based on Orderly Liquidation Value.

As you can see, there are many different situations where understanding orderly liquidation value in your equipment is important to your bottom line. When you need equipment appraisals, it's important to work with an equipment appraiser who is certified, because the certification training process ensures they know which standardized methodologies to use in which situations. Why is that important? Standardized methodologies are developed to stand up to strong scrutiny, including legal, insurance, financial and tax circles. Getting a quality equipment appraisal is vital to your bottom line.

Tags: bank financing collateral, selling equipment, orderly liquidation value

Filing for bankruptcy: What role will equipment values play?

Posted by Equipment Appraisal Services on Tue, Feb 28, 2017 @ 01:08 PM

bankrutcy equipment value appraisal.jpg

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.

Tags: bankruptcy, forced liquidation value, orderly liquidation value