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Equipment Appraisals: What is the Collateral Worth?

Understanding the Machinery & Equipment Appraisals and Values

By Shán O’Keeffe

Many lenders are confused by the terminology of Machinery & Equipment Appraisals. When evaluating collateral, lenders have to decide on the premise of value, such as: What is the difference between Fair market Value and Fair Market Value In Place? What is the difference between Orderly Liquidation Value and Forced Liquidation Value? It is very important that there is clear understanding of the values sought both by the client (lender) and by the appraiser.

The following are some of the more commonly used values as defined in the publication Valuing Machinery and Equipment: The Fundamentals of Appraising Machinery & Technical Assets, Second Edition, by the American Society of Appraisers.

Fair Market Value is the estimated amount, expressed in terms of money, that may reasonably be expected for a property in an exchange between a willing buyer and a willing seller, with equity to both, neither under any compulsion to buy or sell, and both fully aware of all relevant facts, as of a specific date.

Fair Market Value in Continued Use is the estimated amount, expressed in terms of money, that may reasonably be expected for a property in an exchange between a willing buyer and a willing seller, with equity to both, neither under any compulsion to buy or sell, and both fully aware of all relevant facts, including installation, as of a specific date and assuming that the business earnings support the value reported.  This amount includes all normal direct and indirect costs, such as installation and other assemblage costs to make the property fully operational. [It may also include other “soft” costs such as commissioning, software, etc.]

Fair Market Value – Installed [In place] is the estimated amount, expressed in terms of money, that may reasonably be expected for an installed property in an exchange between a willing buyer and a willing seller, with equity to both, neither under any compulsion to buy or sell, and both fully aware of all relevant facts, including installation, as of a specific date.  This amount includes all normal direct and indirect costs, such as installation and other assemblage costs, necessary to make the property fully operational.

Orderly Liquidation Value is the estimated gross amount, expressed in terms of money, that could be typically 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 is the estimated gross amount, expressed in terms of money, that could typically 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.

[The primary differentiator between Orderly Liquidation Value and Forced Liquidation Value is exposure time]

Liquidation Value in Place is the estimated gross amount, expressed in terms of money, that could typically be realized from a failed [closed] facility, assuming that the entire facility would be sold intact with a limited time to complete the sale, as of a specific date.

Salvage Value is the estimated amount, expressed in terms of money, that may be expected for the whole property or a component of the whole property that is retired from service for possible use elsewhere, as of a specific date.

Auction Value is a term often used but it is not a recognized premise of value as it can vary. It can be either Orderly Liquidation Value or Forced Liquidation Value depending on the circumstances. It can sometimes also be Fair Market Value if auctions are the normal way that such equipment is traded.

There are two general types of Machinery & Equipment Appraisal reports: A Desk-top Appraisal and a Summary Appraisal report. In a desk-top appraisal the appraiser is asked to rely on data supplied by others (including photographs, quantity, make, model, condition etc.) for his/her valuation. Most lenders prefer a Summary Report where the Appraiser verifies the existence and condition of the assets being appraised.

Shán O’Keeffe is Executive Vice President of Murphy Valuation Services, Inc., a nationwide Business Valuation and Machinery & Equipment Appraisal company, providing valuations for many purposes including loan collateral, sale, special assets, partnership issues, divorce, etc. Mr. O’Keeffe is one of only eleven Master Certified Machinery & Equipment Appraisers (MCMEA) in the nation.

Murphy’s machinery & equipment appraisers are certified by the NEBB Institute and each is authorized to use the designation of Certified Machinery & Equipment Appraiser (CMEA). Murphy is the largest single-company source of CMEA’s in the nation and consequently able to serve clients from coast to coast.

Murphy’s valuations are compliant with the requirements of the Uniform Standards of Property Appraisal Practice (USPAP) and the Institute of Business Appraisers (IBA).