Fair market value is what a willing buyer would pay a willing seller with neither under pressure, and when the machine is valued installed and working in the business it is the highest figure in the report. Orderly liquidation value is what the equipment would bring if the owner had to sell it, as is, over a reasonable period. Forced liquidation value assumes a quick auction and is lowest. Banks and asset-based lenders lend against orderly or forced liquidation value, often net of selling costs; fair market value matters for leases, purchase price allocations and business valuations, not for sizing a secured loan.
- Highest value
- Fair market value in continued use: installed and operating in the business
- What secured lenders use
- Orderly liquidation value, often net of selling costs; sometimes forced liquidation value
- Lowest value
- Forced liquidation value: a quick auction sale
- Most liquid
- Rolling stock and standard machines with active auction markets
- Least liquid
- Specialized, custom or heavily installed machinery
The values in an equipment appraisal
An equipment appraiser values the same asset under different assumptions about who is selling, how fast and in what condition. The assumptions matter more than the machine: a machining center, a press line or a fleet of trailers can carry values in the same report that differ by a wide margin. The standard set, from highest to lowest:
| Value | The assumption | Where it is used |
|---|---|---|
| Fair market value in continued use | The equipment stays installed and working as part of an operating business; includes the cost of installation, rigging and connection | Business valuations and purchase price allocations in an acquisition |
| Fair market value in exchange (removal) | A willing buyer and seller, neither compelled, the equipment removed and sold on its own | Fair market value leases, sale-leasebacks, some tax and accounting purposes |
| Orderly liquidation value | The owner must sell, as is, where is, but has a reasonable period to find buyers, often a matter of months | Bank term loans, asset-based lenders' equipment component |
| Net orderly liquidation value | Orderly liquidation value less the costs of the sale: commissions, removal, advertising, holding costs | Asset-based lenders; the most common basis for an equipment advance |
| Forced liquidation value | A quick sale, usually a single auction, with little time to market | Conservative banks, workout and special assets groups, lenders to weaker credits |
The gap between fair market value in continued use and liquidation value is widest for equipment that is expensive to remove and reinstall, or that only a few buyers can use. A machine bolted to a reinforced foundation, wired into a production line and configured for one product is worth a lot to the business running it and much less to anyone who has to take it apart, ship it and set it up again. A tractor-trailer is worth about the same to its owner as to the next carrier, so its values sit close together.
Which value each lender uses
Every secured lender is asking what it would recover if it had to repossess and sell. They differ in how they answer, which is why the same fleet can support very different loans from different lenders.
| Lender | Value it lends against | How the advance works |
|---|---|---|
| Equipment finance company, new equipment | The invoice cost of the new machine | A large share of cost, sometimes all of it for strong credits, secured by that machine alone |
| Equipment finance company, used equipment | Orderly liquidation value or published auction and dealer values | A share of that value, shorter terms for older equipment |
| Bank term loan | Orderly or forced liquidation value | Equipment counted at a discount in the bank's collateral coverage test |
| Asset-based lender | Net orderly liquidation value | An amortizing machinery and equipment piece of the facility, sized as a share of that value |
| Cash-flow or unitranche lender | Mostly earnings, not the appraisal | Equipment sits under the blanket lien; the loan is sized on EBITDA |
| SBA 7(a) lender | Collateral values discounted under SBA and lender policy | Collateral is taken where available, but the loan is sized on cash flow |
Two consequences follow. First, an equipment-heavy business with modest earnings may borrow more from an asset-based or equipment lender, which gives the machines real credit, than from a cash-flow lender, which mostly does not; see machinery and equipment in an ABL facility. Second, a lender quoting against forced liquidation value and one quoting against orderly liquidation value are not comparable until the two are put on the same basis, which is part of comparing term sheets properly.
Before comparing two equipment advances, find out which value each one is a share of.
A worked example
A contract manufacturer owns a large machining center, installed on its own foundation with dedicated tooling. The appraisal gives these values, in plain numbers:
| Value | Amount |
|---|---|
| Fair market value in continued use | 400 |
| Fair market value in exchange | 330 |
| Orderly liquidation value | 240 |
| Net orderly liquidation value (after removal, rigging, commission) | 210 |
| Forced liquidation value | 160 |
The owner thinks of the machine as a 400 asset. An asset-based lender sizes against 210 and advances a share of that. A conservative bank may start from 160. Nothing about the machine changed; only the question being asked of it did. The difference between 400 and 210 is not the appraiser being harsh. It is the cost of taking the machine out, the smaller pool of buyers for used, specialized equipment, and the discount any buyer demands from a seller who has to sell.
Machinery versus rolling stock
Lenders sort equipment by how easily they could sell it, and that sorting drives advance rates more than the equipment's price does.
- Rolling stock, such as trucks, trailers and titled vehicles, and mobile construction equipment, trades in deep auction and dealer markets with published results. Values are easy to check and liquidation is quick, so lenders advance a larger share of liquidation value. Values fall with age, miles and hours, so advance rates and terms follow each unit's age and condition. On titled vehicles the lender's lien is perfected by noting it on the certificate of title, not by a UCC filing, so the titles are part of the closing.
- Standard machine tools and production equipment from well-known makers, not heavily installed, sit in the middle: a real secondary market, but removal and shipping costs to deduct.
- Specialized or custom machinery, integrated lines, and equipment built for one product have the smallest pool of buyers and the highest removal costs. Liquidation value is a small fraction of replacement cost, and advances are lower and sometimes nil.
- Soft costs and leasehold improvements, such as installation, software, tooling specific to one customer and building improvements, rarely carry liquidation value at all, even though they sit on the fixed asset register.
For a business with both kinds, lenders often finance rolling stock separately, where it earns the best advance, and let the specialized equipment sit under the senior lender's blanket lien as supporting collateral. Equipment financing alongside senior debt explains how the two fit together, and purchase money security interests explains how an equipment lender takes first priority on the machines it funds.
Where fair market value still matters
Fair market value is not irrelevant to borrowers; it just answers different questions.
- Acquisitions. In an asset purchase the price is allocated among the assets for tax purposes, and equipment is allocated at fair market value. The buyer's lender, meanwhile, credits that same equipment at liquidation value. The difference is part of why acquisitions look under-collateralized; see purchase price allocation and financing goodwill.
- SBA business valuations. Where the amount financed, less appraised real estate and equipment, exceeds $250,000, SBA requires an independent business valuation. An equipment appraisal therefore feeds directly into whether a valuation is required and what it covers; see the SBA business valuation.
- Leases. A fair market value lease ends with an option to buy the equipment at its fair market value then, which is why it behaves differently from a loan in a refinance; see FMV vs dollar buyout leases.
- Sale-leasebacks, where a lessor buys equipment and leases it back, are often priced nearer fair market value than a loan against the same equipment would be sized.
Getting an appraisal that holds up
The appraiser is engaged by or for the lender, and the borrower usually pays. Some lenders accept a desktop appraisal built from the fixed asset list and photographs; larger or more specialized fleets get an on-site inspection. Either way, the appraisal is only as good as the list behind it. Have ready:
- A fixed asset list by item: make, model, serial number, year, hours or miles, condition and location
- Titles for every vehicle and titled trailer, and who holds them
- Existing liens on each item, with the lender and balance, from the debt schedule
- Recent major overhauls or rebuilds, which support value on older equipment
- Anything leased rather than owned, identified separately so it is not counted as collateral
An asset list that matches the floor, with serial numbers that tie out, is the difference between an appraiser crediting a machine and discounting it for uncertainty. Transparent's book holds 244 lenders writing equipment finance, and they value equipment differently: some lend readily against specialized machinery in their own industries, others only against rolling stock. Matching the fleet to the lender that knows its market is usually worth more than negotiating the advance rate.
Common questions
- What is the difference between OLV and FMV?
- Fair market value assumes a willing buyer and a willing seller, neither under pressure. Orderly liquidation value assumes the owner must sell, as is, within a reasonable period. Liquidation value is lower, often by a wide margin for specialized equipment.
- Which value will my bank use?
- Usually orderly liquidation value, sometimes forced liquidation value, discounted again in its collateral coverage test. Ask which value the term sheet refers to before comparing offers.
- Why is my equipment worth less to a lender than on my books?
- Book value reflects what was paid, less depreciation, and includes installation and soft costs. A lender counts only what the equipment would bring in a sale after removal and selling costs.
- Do I need an appraisal to finance new equipment?
- Usually not. Equipment finance companies lend against the invoice for new equipment. Appraisals matter for used equipment, refinancing an existing fleet and asset-based facilities.
- How often is equipment reappraised?
- On an asset-based facility, commonly every year or two, and sooner if results weaken or the loan is in default. Term loans secured by equipment are often not reappraised unless the loan is refinanced or modified.