Most of us are confident we know the value of equipment we own.
After all we know what we paid for it, what it is costing us to
maintain, and what income it is generating for us. The more challenging questions to answer are:
What’s it worth to someone else? What is it worth to an independent
third party whose motivation in buying your equipment is to maximize
their own financial interests? What is it worth to the financing
company whose interest in is assuring payback on a loan? What is
it worth to the fleet manager who needs a particular piece for a
specific application? What is it worth to the insurance company
who is insuring the equipment for its replacement cost? The appraisal profession has its roots in the real estate industry
where property appraisals provide the basis for mortgage lending.
Equipment appraisals were initially introduced by the insurance
industry as a means to determine the replacement cost of a damaged
or stolen piece of equipment. When banks began securing loans with equipment it was not uncommon
for the contractors to supply both the equipment list and their
own opinion of the equipment’s value directly to their banker.
Then the Savings and Loan Fiasco of the 1970’s and 1980’s
hit and the appraisal industry was held directly responsible for
fraudulent real estate valuations resulting in tremendous financial
losses and a federal bailout of the lending institutions. In the
late 1980s the “Uniform Standards of Professional Appraisal
Practice” (USPAP) was recognized in federal law and provides
a framework for appraisal industry standards, skills, tools, and
enforcement. Today, real estate appraisers are required to be certified
by the state in which they practice. Professional appraisers in
other disciplines such as Business Valuation, Personal Property,
and Machinery & Equipment must adhere to USPAP in order to be
a member in good standing of a major appraisal society. How does USPAP affect the equipment owner or fleet manager? The
benefit of USPAP is its uniform standards for developing a reliable
valuation conclusion. It requires the appraiser to clearly state
all relevant facts and demonstrate how they lead to the stated value.
It reinforces the requirement that the appraiser must be an independent
and unbiased source who has fiduciary responsibility to the customer
and any unknown third party user of an appraisal report. And, increasingly,
USPAP is cited in legal actions as the standard by which valuations
are measured for competency. Appraisals may be performed for an owner, interested buyer, attorney,
accountant, insurance company, loan officer, widow, partner, interested
seller, equipment dealer, etc. The reason for an appraisal and the
customer profile becomes more varied every year. As a result, the
issues of appraisal standards have become extremely important. How can machinery have so many different values?
In the old days equipment had a high and a low value, often called
market value or fair value and quick-sale or auction value. As time
passed the creativity of commerce lead to several dozen versions
of these values, each with a slightly different stated or implied
meaning.
In order to operate with a common terminology, the appraisal profession
has developed numerous value standards and definitions for equipment.
Some of the more common values used in conjunction with construction
equipment follow:
- Fair Market Value (FMV): the most
widely recognized and accepted standard of value, known as the
price at which property would change hands between a willing buyer
and a willing seller, both adequately informed of the relevant
facts and neither being compelled to buy or sell.
- Fair Market in Use (FMV-IU): commonly
used when valuing fixed processing plants. This assumes that the
facility will continue to operate profitably in place and goes
a step beyond FMV by taking into consideration installation costs
of the facility which are depreciated over the expected life of
the facility.
- Orderly Liquidation Value (OLV): the
price that would typically be realized from a sale, given a reasonable
period of time to find a purchaser(s), with a seller being compelled
to sell on an “as-is, where-is” basis. This is often
considered a “wholesale” value that a dealer or broker
would pay for equipment.
- Liquidation Value (LV): a standard
similar to OLV listed above, but with the distinction of a “forced”
liquidation that assumes the assets must be sold with a sense
of immediacy on an “as-is, where is” basis as of a
specific date, either piecemeal or through a bulk sale.
Which value is appropriate?Equipment owners can be of the opinion that since they paid “x”
for a unit and operated it for “y” years, the resulting
depreciated value should be “z”. However, the original
price and cost of a unit doesn’t necessarily relate to its
current value. Ever heard of who paid too much for an item or the
opposite, got a great deal? A retail price or list price from an
equipment dealer rarely reflects a fair market value. A retail sale
from a dealer includes either a stated or implied warranty and typically
represents a premium in excess of FMV. In addition it is not uncommon
for the retail purchase price to vary dramatically from the retail
list price given factory incentives, quantity discounts or “market”
pricing practices.
When
beginning an appraisal assignment, it is the responsibility of the
appraiser to advise the client which value definition is most appropriate
for a given valuation assignment. For an owner contemplating a sale
of equipment, FMV or a combination of FMV and OLV will often be
included in the assignment. For a buyer considering the purchase
of a fixed batch plant with the intent of continued operations,
either FMV or FMV-IU might be used. If, on the other hand, a fixed
plant is to be purchased and relocated, then the valuation would
focus on the value of re-usable plant components in terms of FMV
or OLV. In other words, the value or values incorporated into the
appraisal project needs to fit the use of the appraisal in order
to be relevant.
You may be asking, what happened to “auction value”?
Auction value is a misnomer and is seldom used any more as a value
standard. It had more meaning 30 years ago when buying at auction
was roughly the same as wholesale or liquidation value. However,
today an auction is more correctly seen as a sales vehicle or a
marketing tool, and the prices realized at auction can vary from
retail to less than scrap depending upon any number of circumstances:
from the auctioneer, the equipment mix, the location, type of advertising
and promotion, size of crowd, economic conditions, and even unseasonable
weather. An auction can produce a variety of sales results.
Author biography
Brian Hennig is an Accredited Senior Appraiser of the American
Society of Appraisers. He is president of Hennig & Company
based in Mountain View, California. He is also the principal of
Higdon Inc
of Albuquerque, New Mexico. His firms specialize in the appraisal
of construction related equipment. He can be reached at 650-961-6642
or info@henniggroup.com.
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