How value can be defined…and why it’s important
At a very basic level, a machinery and / or equipment appraisal provides an objective, accurate value to a business and its machinery and technical assets. How that value is determined, however, depends largely on how “value” is defined. And how it’s defined can depend on your specific situation and circumstances.
Because the scenarios necessitating an appraisal can vary widely, the definitions of value in leases or buy / sell agreements can vary widely, too – especially in appraisals covering assets heavy in machinery and equipment.
Below, we highlight some of the most common definitions of value as they relate to what the American Society of Appraisers calls “Mechanical and Technical Specialties” assets. This list isn’t comprehensive (if interested, you can find a comprehensive list here) but does cover the value premises we believe are the most prominent and important.
Fair Market Value (FMV): As you would probably guess, this is the most common term and value premise used in M&E appraisals and is defined as “an opinion expressed in terms of money, at which the property would change hands between a willing buyer and a willing seller…both having reasonable knowledge of relevant facts, as of a specific date.”
Within FMV, however, there are two primary sub-definitions an appraiser may choose to apply based on specific situations and circumstances and that can bring with them a large value determinant for heavily installed assets in manufacturing, processing, packaging, etc.:
FMV-Installed or -In Use: Beyond standard FMV, this definition clarifies that the assets are included with the facility, meaning the value of installation and integration is also included in the appraisal / valuation. This type of valuation is commonly used for purchase price allocation, tax filings, divorce or insurance litigation, and shareholder buyouts, for example.
FMV-Removed: As its name implies, this definition clarifies that property being appraised / valued will be removed to another location, meaning all value of installation and integration is lost.
Other common definition of value include:
Orderly Liquidation Value (OLV) and Fair Liquidation Value (FLV): These both mean the assets must sell for removal, in a limited timeframe, and in as-is condition. This is commonly used for collateral lending and asset purchase negotiation.
Actual Cash Value (ACV): This is usually defined in an insurance policy and can vary widely by situation.
Knowing which value premise most closely applies to your specific valuation need is critically important in ensuring the most accurate appraisal, of course. And working with an experienced, expert machinery and equipment appraiser to help you determine the correct value premise for your situation and who understands the implications is even more important.