“Equipment can legitimately have at least half a dozen different types of values that apply in appropriate circumstances,” says Darrell Thorvaldson, an accredited equipment appraiser and Vice President of the Appraisal Institute of Canada.
“There is a hierarchy of different value types ranging from very high to very low that are all market based and completely separate from the ‘book’ equipment values that entrepreneurs see on their annual financial statements,” he says.
What is the purpose of the valuation?
The first step in valuing equipment is to understand the purpose of the valuation. This helps you figure out which value is appropriate to use. The three most common categories are:
1. Buying or selling equipment
When buying or selling used equipment, the most common valuations are:
- fair market value
- orderly liquidation value
- forced liquidation value
Which one to use depends on the circumstances of the purchase or sale. For example, a regular transaction between two willing parties usually relies on fair market value, while liquidation value may be involved in a bankruptcy.
Businesses often need to know equipment values during insurance claims or to ensure they have appropriate insurance coverage.
The most typical values in use for insurance purposes are:
- actual cash value
- replacement cost new
- reproduction cost new
Which one is used affects the premium and depends on the insurance policy.
3. Continued use
The “continued use” category applies to equipment you’re using in your business and have no intention of selling. You may need to know its value for financial reporting or to use the equipment as security for financing.
It’s typical to determine fair market value for such purposes, though some banks may collateralize equipment based on its forced liquidation value.
Here are various values that may be assigned to used equipment, depending on the purpose of the valuation.
Actual cash value (ACV)
Replacement cost new minus depreciation based on remaining useful life.
Fair market value (FMV)
Estimated amount the asset would sell for in the market.
Fair market value—installed
FMV plus installation and assembly costs to make the asset operational.
Fair market value in continued use
FMV—installed plus any adjustment for the equipment’s income-generating potential.
Forced liquidation value (FLV)
Estimated gross amount the equipment could sell for at an auction held immediately.
Orderly liquidation value (OLV)
Estimated gross amount the equipment could sell for in a liquidation sale given reasonable time to find a buyer.
Replacement cost new (RCN)
Current cost of buying a new asset that does the same thing as the existing equipment.
Reproduction cost new
Current cost of constructing a duplicate of the asset.
Three main methods for valuing used equipment
Once you determine which value is appropriate for your purposes, you’re ready to research how much the equipment is worth. Appraisers can use a combination of these three methods:
1. Sales comparison method
In the sales comparison method, an appraiser determines the equipment’s value by researching the market for similar new and used equipment, and seeing what it has sold for. They may make adjustments for the equipment’s age, condition, remaining useful life and other factors.
Appraisers typically look at a variety of market data sources, such as manufacturers, dealers, auction houses and trade publications.
2. Cost method
The cost method is typically more important if equipment doesn’t have an active market because it is unique or highly customized. You start by determining the equipment’s replacement cost new. This value is then depreciated based on the existing equipment’s age, condition and other factors.
3. Income method
This method determines a value for equipment based on how much income it produces. It may be relied on more when the asset is clearly tied to a specific income stream.