Equipment Appraisal Blog | Understanding Machinery Appraisals

There are many reasons why business owners need to have a current appraisal completed for their machinery and equipment. Refinancing, mergers and acquisitions, tax and accounting regulations, trade-in or liquidation, new investors, and business disputes, to name a few. For each purpose, it is important to have a clear understanding of the appropriate types of values that will fit the particular project, as there will likely be a material difference between them.

Here are the most common types of value premises utilized in equipment appraisal, and their definitions as listed by the American Society of Appraisers:

Fair Market Value-Installed

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, considering market conditions for the asset being valued, independent of earnings generated by the business in which the property is or will be installed, as of a specific date.

Fair Market Value

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

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

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.

Fair Market Value-Installed is often used when the equipment is part of a manufacturing or production facility where a lot of additional costs are associated with the purchase and installation. Fair Market Value is perhaps the most recognized term and best represents an arms-length transaction with no other considerations. Both Orderly and Forced Liquidation values are utilized by banks for financing purposes and by sellers who don’t have the ability or reputation to market their machinery in competition with typical dealers.

Before undertaking the valuation project you are working on, discuss these different premises of value with an experienced accredited appraiser who can assist with making the right choice.

When an appraiser estimates value, they must do so under an assumed premise that relates to the type of transaction being undertaken and the potential outcomes of an impending sale. Premise of value is one of the most critical components of an equipment appraisal given the different assumptions each premise represents and their material differences.

Each value premise must be defined in the appraisal and can reasonably be tied to a typical market transaction, such as a user-to-user sale or an auction liquidation. The most commonly referred to premise is Fair Market Value, which is utilized in many standard business agreements when the need arises to assess value for any purpose. The American Society of Appraisers defines Fair Market Value as follows:

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.

There are variations to the Fair Market Value premise, including assumptions for installation and continued use, which typically drive higher levels of value given the additional considerations involved. The important factor to understand with Fair Market Value is that it represents the most equitable transaction for both parties, where neither the buyer nor seller have an advantage. Each party is equally willing to transact and knowledgeable of all the facts.

In the open resale marketplace, this may not always be the case, therefore, other premises of value are considered, including Orderly and Forced Liquidation. These definitions add the factor of compulsion on behalf of the seller, with more limited time to sell a key factor. These premises are appropriate to consider with an inexperienced owner or if a company goes out of business. There may be a reduced level of control over the sale by utilizing a third party, such as an auctioneer, to liquidate the assets. This is the foundation for Forced Liquidation Value.

Liquidation premises of value are commonly reviewed by banks and other lenders who want to consider the possibility of having to step in and resell the equipment if their borrower defaults and they end up taking possession of the assets. They are not in the business of buying and selling machinery and may involve an equipment dealer or auction company to manage the logistics of a resale effort.

These liquidation premises will obviously drive a lower estimated value for the machinery & equipment. How much lower will depend on the type of equipment and the state of the resale market, among other factors. Consult with an appraiser to better understand these differences.

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.