Value of Used Business Equipment

Value of Used Business Equipment

Every business owner at one time or another ask themselves, what is the real financial value of used business equipment? I often find that they under estimate the value of their assets as it relates to the useful life that still exists and compare it in U.S. dollars which could typically be realized at a properly advertised and conducted public auction sale, held under forced sale conditions and under present day economic trends, as of the effective date of the appraisal report. Conclusions taken into consideration are physical location, difficulty of removal, physical condition, adaptability, specialization, marketability, overall appearance and psychological appeal. Further, the ability of the asset group to draw sufficient prospective buyers to insure competitive offers is considered. All assets are to be sold on a piecemeal basis “as is” with purchasers responsible for removal of assets at their own risk and expense. Any deletions or additions to the total assets appraised could change the psychological and/or monetary appeal necessary to gain the price indicated.

Orderly liquidation value represents a professional opinion of the estimated most probable price expressed in terms of cash in U.S. dollars which the subject equipment could typically realize at a privately negotiated sale, properly advertised and professionally managed, by a seller obligated to sell over an extended period of time, usually within six to twelve months, as of the effective date of the appraisal report. Further, the ability of the asset group to draw sufficient prospective buyers to insure competitive offers is considered. All assets are to be sold on a piecemeal basis “as is” with purchasers responsible for removal of assets at their own risk and expense. Any deletions or additions to the total assets appraised could change the psychological and/or monetary appeal necessary to gain the value indicated.

Desktop opinion reflects a professional opinion of the appropriately defined value, expressed in terms of cash in U.S. dollars to be realized by the sale of equipment, in which the opinion is generated front lists and/or other informational materials supplied to the appraiser and evaluated without the benefit of an actual on site inspection. This opinion is not an appraisal and should not be used as an appraisal and is not recommended for use in credit decisions. A desktop opinion is used to determine the need for an appraisal or the scope of an appraisal.

Approaches to Value

Market research is one of the three recognized approaches used in appraisal analysis, and involves the collection of market data pertaining to the subject assets being appraised. This approach is also known as the “comparison sales approach.”

The primary intent of the market approach is to determine the desirability of the assets and recent sales or offerings of similar assets currently on the market in order to arrive at an indication of the most probable selling price for the assets being appraised. If the comparable sales are not exactly similar to the asset being appraised, adjustments must be made to bring them as closely in line as possible with the subject property.

“Cost Approach” is another of the three recognized approaches used in appraisal analysis, and is based on the proposition that the informed purchaser would pay no more for a property than the cost of producing a substitute property with the same utility as the subject property. It considers that the maximum value of a property to a knowledgeable buyer would be the amount currently required to construct or purchase a new asset of equal utility. When the subject asset is not new, the current cost must be adjusted for all forms of depreciation as of the effective date of the appraisal.

“Income Approach” is the last of the three recognized approaches used in appraisal analysis. This approach considers value in relation to the present worth of future benefits derived from ownership, and is usually measured through the capitalization of a specific level of income. This approach is the least common approach used in the valuation of machinery and equipment since it is difficult to isolate income attributable to such assets.

Depreciation is defined as the actual loss in value or worth of a property from all causes, including those resulting from physical deterioration, functional obsolescence and economic obsolescence.

Physical deterioration is a form of depreciation where the loss in value or usefulness of an asset is attributable solely to physical causes such as wear and tear and exposure to the elements.

Functional obsolescence is a form of depreciation where the loss in value is due to factors inherent in the property itself and due to changes in design, or process resulting in inadequacy, over capacity, excess construction, lack of functional utility or excess operating costs.

Economic obsolescence is a form of depreciation, or loss in value, caused by unfavorable external conditions. These unfavorable external conditions can include such things as the economics of the industry, the availability of financing, the loss of material and labor sources, as well as the passage of new legislation and changes in ordinances.

About the Author
Paul C. Watson is an Associate Broker and a Principal in The HFI Companies and President of Capital Business Appraisers. The HFI Companies is a business brokerage and commercial real estate services company based in Springfield, Virginia. The company has been in operation since 1974. Capital Business Appraisers is an affiliated company providing machinery and equipment appraisals, business appraisals and litigation support services.

Mr. Watson has a B.S. degree from American University.  He is also a graduate of the Rutgers Graduate School of Banking. He holds the designations of CMEA (Certified Machinery and Equipment Appraiser) from the National Equipment & Business Brokers Institute (NEBB), CBA (Certified Business Appraiser) from the Institute of Business Appraisers (IBA), CBI (Certified Business Intermediary) from the International Business Brokers Association (IBBA), CCIM (Certified Commercial Investment Member) from the Commercial Investment Real Estate Institute, and CCL (Certified Commercial Lender) from the American Bankers Association. He has attended over 250 hours of training in business and machinery and equipment appraisal courses offered by the NEBB, IBA and IBBA.

He is a member of the National Equipment and Business Brokers Institute (NEBB), Institute of Business Appraisers (IBA), the International Business Brokers Association (IBBA), the Washington Business Brokers Association, the National Association of Realtors, the Commercial Investment Real Estate Institute and the Mid-Atlantic Real Estate Marketing Association. He is also an officer and board member of the Mid-Atlantic Business Brokers Association (an IBBA affiliate).

Prior to his acquiring HFI and founding Capital Business Appraisers, he spent 20 years as a commercial lender at several large regional banks. He has sold many small businesses over the past sixteen years in the Washington/Baltimore market. In addition, he has performed many business valuations in connection with buy/sell transactions, determining value for gift and estate tax purposes, divorces, partnership dissolution’s and establishing value for SBA lenders. He has also been qualified as an expert witness in divorce court.