Because professional liquidators regularly sell distressed assets on the secondary market through auctions or liquidations, they are “in the trenches” daily, gathering information, data and insight that are simply not accessible to others. They also are commonly familiar with changes in technology and market volatility, in addition to other dynamic industry trends that can influence recovery values.
For these and other reasons, liquidators are often perceived as superior resources for pre-funding due diligence or review of collateral on existing loans. However, to be assured of receiving the most accurate valuation possible, it is important to understand how M&E appraisers work, the value concepts they typically employ, and the insight liquidators bring to the entire appraisal process.
Equipment appraisers across all commodities generally use uniform valuation principles and methodology so that their reports can be commonly interpreted and used by financial professionals, courts, federal, state and local government agencies, and businesses of all types and sizes.
The quantity, mix and composition of the equipment is assessed and compared to current related values for similar assets in consideration of age, manufacturer, model, characteristics, size and capabilities. Accessories, optional features and modifications to the subject equipment also are factored in, as well as the location of the property as it relates to accessibility to potential auction or liquidation buyers.
Three types of depreciation — physical, functional and economic obsolescence — are generally assessed, in addition to comparable new and used equipment currently available on the market. Existing market demand within the appropriate industry for similar assets is factored into the analysis, as are present economic conditions, cost of installation, de-installation and any other environmental or removal costs. Appraisers also consider the highest and best use of the subject assets in their analysis.
Cost Approach Versus Market Approach
Once the subject assets have been organized and identified, appraisers will typically utilize two of three established approaches in their research and analysis: a cost approach and a market approach.
With the cost approach, the appraiser determines the current replacement or reproduction cost of an item and then adjusts that figure in consideration of the item at hand, to properly address the corresponding value concept.
Using the market approach, the appraiser looks at recent sales and/or offerings of items comparable to the subject asset on an individual market basis. Comparables are then adjusted, if needed, in order to equate them as closely as possible to the item being appraised, in consideration of the appropriate value concept. The projected future earnings of assets, measured through the income approach, are generally not applied to liquidation value appraisals of machinery and equipment.
Why a Market Approach?
Generally, the market approach is the most applicable and accurate indicator of the projected worth of an asset. There is no guide more fitting than knowledge of a recent sale of an item with characteristics equal to a subject item. When the characteristics of the comparable do not equate to that of the subject item, the comparable is then adjusted. As an example, a comparable sales figure of a vehicle may be adjusted up or down to allow for a difference in odometer mileage.
Market data, using the market approach, is always preferred in liquidation value appraisal work. However, for many reasons, such market data is not always available. When that situation arises, the appraiser often reverts to a cost approach in the asset analysis. Once a current replacement cost has been established, the appraiser deducts for the loss in value caused by any type of depreciation, as well as any other factors that make it less desirable to own than if it were new.
Such an analysis may consider the normal useful life of an item contrasted with a projection of its remaining useful life. Items that have been rebuilt or modified may require more thorough examination.
Users of machinery and equipment appraisals should also be aware that when the term “depreciation” is used in appraisal analysis, it has a different meaning than when it is used for accounting purposes. Depreciation in matters of appraisal work can be defined as “the difference in value between an existing older item and a hypothetical new item taken as a standard of comparison.” Appraisal depreciation is used to measure “value inferiority” of an item as compared to a new replacement or reproduction of the subject asset.
When the new cost of an item is unavailable, the professional appraiser will apply statistical trends or create an index to estimate a current cost. When properly performed, such projections can be very useful and reliable. However, nothing is more valuable than a current market sale comparable.
Forced and Orderly Liquidation Values
The most efficient appraisers are those who regularly follow liquidation market values. In addition to our own liquidation and appraisal personnel, experience and expertise, our firm has cultivated a nationwide network of hundreds of trusted commodity-specific advisors. Rather than relying solely on pricing guidebooks, depreciation formulas or out-dated auction results, the active liquidator knows who the current “market makers” are in various machinery and equipment sub-markets.
Quite often, the melding of the liquidator’s knowledge with the insight of secondary market participants or specialists constitutes the basis for a thorough and accurate appraisal product. By partnering with the right advisors, the liquidator can determine the most current indicator of the projected recovery value of a particular asset pool.
When credit decisions are the intended use for M&E appraisals, the appropriate value concept is crucial to achieving a useful and valid appraisal. In order to render a true picture of the estimated recovery value of the collateral, Forced Liquidation Value (FLV) and Orderly Liquidation Value (OLV) are the value concepts our firm most often employs.
Both concepts generally consider the disposition of the collateral on a piecemeal basis for removal. A forced liquidation is generally carried out by way of a public auction sale — or series of auctions — while an orderly liquidation is typically realized through one or a series of privately negotiated transactions. Liquidators provide market knowledge and insight to the secured party, as their activities are focused on these specific trade channels.
Variable elements that both FLV and OLV take into consideration include the time periods given to liquidate the assets, time constraints that often accompany forced sale scenarios, both the time and costs associated with the removal of industrial equipment and machinery, and the projected impact such factors have on prospective buyers.
When, for example, a potential market includes overseas buyers, time must be allowed for those buyers to arrange travel for inspection and removal of the equipment. In the wake of 9/11, foreign buyers, along with their engineers and technicians, often endure long waiting periods for visas to enter the United States. In such cases, time constraints brought on by forced sale situations can negatively impact the effectiveness of marketing efforts to promote an auction sale.
Equipment removal costs can also be significant considering that much industrial machinery is over-sized and can weigh hundreds of tons. Costs to match-mark, disassemble, load and transport such machinery can be extremely high. Astute appraisers examine such projected costs and factor them into their valuation analyses.
The Importance of the Net-Value Analysis
One of the most important services provided by liquidators is a projection of sale-related costs and fees to arrive at the net value of the subject assets.
In addition to sales commissions, estimated expenses for project and sale-site management, labor, marketing and advertising, Internet webcast, security, occupancy, travel, insurance and miscellaneous costs are deducted from the gross value to arrive at a projection of the net-realizable proceeds.
Forced liquidation sales generally take less time to complete than orderly liquidation sales, and they typically incur lower costs. The benefits of a projected higher gross recovery must be weighed against the costs of conducting a longer sale. In many cases a higher net recovery may be projected under the FLV concept than that assigned under OLV. Only when the NET values relative to FLV and OLV are compared side by side can the intended user make an informed decision.
Market Insight, Contacts & Expertise
Issues of supply and demand are crucial in most instances. In certain cases, they can dramatically impact recovery values. Active liquidators are often aware of pending plant and machinery sales in advance of the lending or dealer communities at large. While some liquidators charge a fee or commission for their services, many will purchase entire plants or asset groupings for liquidation, offer a performance guarantee, or take a joint venture position. The market knowledge needed to invest or guarantee large sums of capital requires the liquidator to maintain current perspective on the secondary marketplace relative to the commodities in which he or she is active. Maintaining strong relationships with active secondary market participants is also essential.
On the surface, M&E appraisals may look to be pretty much the same. However, it is what the party doing the appraisal “brings to the table” that enhances his value to the lender and elevates his product above that of his competitors. It can be compared to an appraisal based solely on theory versus a study based on true market conditions. What’s important is going the distance and providing a comprehensive examination of the net value of the collateral. lenders and lessors should accept nothing less.
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