What is the Proper Equipment Appraisal Value Levels for a Business Owner?
Appropriate Value Levels for the Business Owner:
As you can see there are a few values that would apply. Here is some insight on this.
- Getting a Loan? - Use Fair Market Value in Continued Use as this is the highest value generally accepted. A lot of times lenders will take whatever number you provide and beat it up - I have seen some even have a set number like 80% all the way down to 40%. We suggest in this scenario to find out that number ahead of time if you can and if able go ahead and have the appraiser give you Fair Market Value in Continued Use, Orderly Liquidation, and Forced Liquidation on the same report. They should have all of those number anyways.
Here is a Case Study on the importance of the right Value
A company (unnamed to protect their dignity) hired an “appraiser” (auctioneer) to value their equipment. The company had nearly 2 million dollars worth of equipment at new cost and the equipment was between 10 and 5 years old. The auctioneer valued the equipment without asking or even realizing what the purpose of the valuation was and gave the company a report showing his values (Auction Value or Forced Liquidation Value). Here is where the problem happens. The bank received the appraisal directly to use as loan collateral validation for a refinance and upon seeing the value decided to play it safe and cut that number in half – not knowing that the auctioneer had already given the bottom dollar. Red flags go off about loan covenants and the loan committee decides to not approve the loan. Appraisal dollars wasted, initial loan fees wasted, relationship with the bank ruined.
- Buy / Sell Scenario - This is a tough one - Generally we see the average value come in somewhere around Orderly Liquidation. The problem is in many Buy / Sell scenarios the numbers shift based on where the taxes are going to be paid. This is a very important thing to consider because it can influence how many dollars finally land in your pocket when you sell - Please consult a Business Broker Here.
- Closing the Doors - This is where you start with orderly liquidation and finally end up with forced liquidation or even scrap. In today's market many times the machinery costs more to remove than it's worth and scrap is really the only option. One thing you may consider here as well is a 1 Check liquidation - this is where a company comes in and buys you out for a fraction of the value. We would still suggest an appraisal here to at least know what you are giving up.
- Finally, sometimes the Fair Market Value - Removed is used when there is a significant cost to remove the items(I have seen this used effectively many times when the other side is screaming for Fair Market Value)