Equipment Appraisal Blog | ASA | USPAP | Machine Value Expert Witness | orderly liquidation value (2024)

Orderly Liquidation Value vs. Net Orderly Liquidation Value

Posted by Equipment Appraisal Services on Mon, Mar 18, 2024 @ 07:30 AM

As appraisers, we are at times asked to estimate orderly liquidation value on a "net" basis, which adds an anticipated cost or expense element to the conclusion. These requests most frequently come from banks and other financial institutions that are not in the business of buying and selling equipment. Their goal is to make a sound credit decision, based in part on a collateral review for a loan or lease, while including a more conservative worst-case scenario, where they would need to recover the equipment and sell it at a future point in time. This might occur in a customer default and repossession situation, bankruptcy, or an end-of-lease return scenario.

For a refresher, here is the formal definition of Orderly Liquidation Value from the American Society of Appraisers (ASA):

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

This estimate is considered a "gross" amount, meaning that it excludes any associated costs of sale that may occur during the period leading up to and associated with the transaction. This is where the "net" component comes into play.

Net Orderly Liquidation Value will consider common expenses associated with a sale. These could include recovery costs such as dismantling, rigging, and shipping; short-term storage; marketing/advertising; and broker fees/commissions. Depending on each specific scenario, these expenses will vary, and some may or may not be applicable. For instance, the size and type of equipment and whether you can keep the machinery at its present location during the marketing period, are large factors pertaining to the removal costs. Leasing companies will often require their customers to return the equipment at their expense during the end of lease stages, while alternatively, in bankruptcy, the bank may need to arrange and pay for this themselves.

To that end, the appraiser will subjectively make reasonable assumptions as to what the average costs may be, in a hypothetical situation, based on their experience. They may determine the focus should be on storage and selling costs, which are more consistent and likely to occur in any situation. Either way, estimating net orderly liquidation value first requires a determination of the gross value, and then applying a reasonable percentage or dollar reduction to that figure, in order to arrive at a final conclusion. Some of the third-party sources relied upon in the normal course of the appraisal can likely assist the appraiser with this calculation.

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What to Expect When Faced With Liquidating the Assets of a Business

Posted by Equipment Appraisal Services on Mon, Dec 13, 2021 @ 07:00 AM

Image source: Compactor. (2023, April 10). In Wikipedia. https://en.wikipedia.org/wiki/Compactor

Whether you own a company or are invested in the business as a principal, financial institution, or related third party, there may come a time when you need to liquidate some or all of the assets associated with the operation. Liquidation is a somewhat more ominous word for resale, typically where there is an urgency to sell the assets or that those individuals involved are not in the business of selling equipment.

As an appraiser, we are asked about this issue quite often, regarding the best approach and realistically what to expect when entering these unfamiliar waters. No single answer covers every situation, however, there are guidelines that can assist the reseller/liquidator who lacks any prior experience in this area.

If your business is reducing operations, or shutting down altogether, and the company owns considerable equipment and personal property, it is important to plan for a liquidation far in advance, where personnel remains available to aid in maintaining the condition of the equipment and can assist in showing the machinery to purchasers.

This will provide opportunities to arrange for the sale of your assets ahead of the actual closure, and allow buyers to preview them while still in operation. In an ideal world, you could effectively sell the assets as part of an ongoing business enterprise, however, if the company can’t sustain profitability, a more realistic scenario would be to locate competitors and other end users who will pay fair market value, based on the machinery remaining in good operable condition until sold.

If neither of these options is feasible, then a comprehensive liquidation effort should take place to realize an orderly (private sale) or forced (auction) liquidation value in a timely fashion.

Communication and timeliness are crucial in a liquidation effort, as the longer it takes to formulate a game plan and ultimately sell the assets, the less value will be realized. If equipment has been neglected for months and begins to fall into poor condition, buyers will no longer be comfortable offering a fair price. It is critical that the assets continue to be maintained, even after they cease operating. Hiring a mechanic to start and run the equipment on a weekly or bi-monthly basis is important to maintaining the condition.

Hiring a private reseller or an auction company who can coordinate the sale of the assets is a good option to complete the liquidation. An experienced third party will oversee the resale effort, while managing the logistics of the sale, including the security of the location, completing minor repairs, and creating a marketing campaign. This will increase the odds of a successful disposition where you pay a commission based on the sale price.

Regardless of the scenario you face, it is important to plan ahead and spend the time and resources needed to maintain the condition of the equipment, leading to a successful outcome in an otherwise difficult situation.

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What Do the Premises of Value Mean in the Resale Marketplace?

Posted by Equipment Appraisal Services on Mon, Oct 19, 2020 @ 08:00 AM

In our last blog post, we discussed Fair Market Value and its translation in the resale marketplace. The example we used was the sale of a used vehicle (car, pickup, SUV). For this week’s post, we will discuss the two liquidation value premises using the same example.

As a refresher, here are the two premises of value and their ASA definitions:

Orderly Liquidation Value

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

Forced Liquidation Value is an opinion of the gross amount, expressed in terms of money, that typically could 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.

Orderly Liquidation Value would roughly translate to a trade-in value at your local dealership with the assumption that you are going to purchase another vehicle with that same dealer. There is enough incentive for the dealer to offer you a decent price given the new business aspect and the dealer’s need to make a profit margin on their ultimate resale of that asset.

The overall value and demand in the market for that particular vehicle will help determine how big that spread is. You will typically see a range of 20-40% between Fair Market Value and Orderly Liquidation depending on those factors. If a dealer has an immediate buyer for a high priced vehicle you are trading in, then the differential will be in the lower end of the range. If it is an older, less valuable vehicle with no resale timeline determined by the dealer, you can expect less of a trade in value in relation to the retail price.

Forced Liquidation Value, by its very definition, translates to an auction level which is generally considered the lowest value of a vehicle given the immediate need or compulsion to sell the vehicle as quickly as possible. You are essentially sacrificing dollars for time in these instances. The only lower levels of value used in appraisals are salvage (parts) and scrap.

The auction resale marketplace is very active in certain industries such as automobiles, trucks, trailers construction and standard metal working equipment. As a result, the levels of resale tend to be somewhat higher than if you were to try to auction equipment in a more confined industry with a limited number of potential buyers.

In summary, these different premises of value will produce a broad range of figures when considering all three in an appraisal assignment. Which ones are most appropriate for your business can be reviewed and discussed with an accredited appraiser prior to the actual valuation.

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What Do the Premises of Value Mean in the Resale Marketplace?

Posted by Equipment Appraisal Services on Mon, Oct 05, 2020 @ 08:00 AM

An ASA accredited equipment appraiser most often uses one or a combination of the following premises of value in their reports:

• Fair Market Value
• Orderly Liquidation Value
• Forced Liquidation Value

These terms are formally defined by the American Society of Appraisers (ASA) as follows:

Fair Market Value

Fair Market Value is an opinion expressed in terms of money, at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts, as of a specific date.

Orderly Liquidation Value

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

Forced Liquidation Value is an opinion of the gross amount, expressed in terms of money, that typically could 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.

We are often asked how these definitions translate to the actual marketplace where the buying and selling occurs every day. To facilitate a response to this question, we will consider selling your used vehicle (car, pickup SUV) when it is determined you need to replace it. We will begin with the Fair Market Value premise.

Fair Market Value is considered the higher end of the value spectrum and can be considered comparable to a private party sale where you, as the owner of the vehicle, put an ad online or in a local paper in an attempt to sell to another private party. The key assumption here is that there is no immediate sense of having to sell or purchase and the sale is on an “as-is where is” basis with no warranty or other conditions of sale.

The ability to obtain Fair Market Value is more realistic if you are in the business of buying, selling, leasing or operating equipment in the applicable industry. That is why new and used equipment dealers will typically be a good source to best understand this “retail” level of value.

To summarize, fair market value while being an accepted level of pricing in an equipment resale effort, many businesses such as banks and other investors look to liquidation values as a more attainable figure in a typical resale scenario.

In our next blog post we will cover the two types of liquidation values as they relate to the sale of your used vehicle.

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Understanding Orderly Liquidation Value in your Equipment

Posted by Equipment Appraisal Services on Tue, Apr 04, 2017 @ 03:21 PM

Understanding orderly liquidation value in your equipment is just something most business owners never consider. Why? In general, liquidation is considered by most business owners to be a sign of failure, such as a bankruptcy liquidation. But there are a number of circ*mstances in which you may need to have an equipment appraiser perform a liquidation machinery valuation that have nothing to do with financial trouble in your business. In this post, we'll take a look at which circ*mstances may call for orderly liquidation equipment values and why this type of appraisal is used in those situations.

How businesses work: understanding orderly liquidation value in your equipment

What is orderly liquidation value?

Orderly liquidation value falls between forced liquidation value and fair market value in terms of monetary compensation. It's calculated under the assumption that the piece of equipment or machinery must be sold, but that there is a longer period of time to do so, such as a few months. You would receive less than you would at fair market value, but receive more than you would under a forced liquidation.

How is it different than fair market value?

Fair market value assumes that the equipment would fall under normal exposure in the market place before being sold for what is perceived as a fair price to both the buyer and seller. There's no serious time limit on how long the equipment would be offeredfor sale, so it would be sold for a higher price than in an orderly liquidation scenario.

How can orderly liquidation equipment values impact my business?

When you're getting ready to sella business, knowing the orderly liquidation values allows you to gain quick cash to help with financing or to provide an additional buffer during the sale process if things don't go as smoothly as you'd like. When you're purchasing a business, knowing these values allows you to relatively quickly sell some of the excess equipment to pay down debts or meet other needs during the process.

In what kind of situations is orderly liquidation value used?

In many circ*mstances, people involved in a business need to receive money relatively quickly for a number of reasons, but are willing to wait a reasonable amount of time to ensure they're getting more from the sale of that asset than they would through a forced liquidation. This can include the breakup of a partnership, the dissolution of a marriage where both individuals were involved in the business, the sale of excess equipment in anticipation of closing a business sale, an unexpected death of a business partner or similar scenarios. By providing additional time, the party that is leaving the business or their heirs will then receive money for the equipment that is sold without having to either lose out on the machine's value through a quick sale or wait a long period of time for it to sell using conventional methods and fair market value. Banks also often lend based on Orderly Liquidation Value.

As you can see, there are many different situations where understanding orderly liquidation value in your equipment is important to your bottom line. When you need equipment appraisals, it's important to work with an equipment appraiser who is certified, because the certification training process ensures they know which standardized methodologies to use in which situations. Why is that important? Standardized methodologies are developed to stand up to strong scrutiny, including legal, insurance, financial and tax circles. Getting a quality equipment appraisal is vital to your bottom line.

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