When asked what I do for my clients, my stock reply has always been, “Manage the orderly disposition of their surplus and idle assets.” That includes asset redeployment, sales, donations, salvage, demolition and pay-for-disposal. Redeployment and sales are at the head of the list because (in most cases) these factors drive Return on Investment (ROI). In order to be effective in achieving maximum investment recovery ROI impact—whether through asset redeployment or disposal—you must know what you have (asset identification) and what it’s worth (asset value).

 
As an investment recovery professional, either as a member of a corporate asset management team or as an independent disposition service provider, the primary goal is to ensure that the company receives the highest possible return at the least possible cost. That means you must be able to accurately establish the market value of the asset(s) in question.
 
Basic Asset Status Considerations

The asset valuation analysis begins with important basic questions about the status of an asset that will affect appraisal:

  •  Why are you disposing of the equipment?
  • What is the condition of the equipment?
  • What is the normal useful life and remaining useful life of the equipment?
  • Is the equipment or its process obsolete?
  • Will the equipment be sold in place for continued use?
  • Are you replacing the equipment and, if so, with what and will the replacement have more or less capacity?
  • Do you know the replacement cost?
  • Do you have the original purchase price of the equipment less freight and installation?
  • What is the current net book value?
  • Has it had any capital rebuilds and, if so, are they reflected in the net book value?
  • How much time do we have to dispose of the assets?
  • What’s more important, the net return or speed of disposal?
  • Can the item be sold in place for customer removal or must it be removed before the sale, and, if so, by when?
  • What is the cost of removal:

                     a. For reuse?

                     b. For scrap?
  • Will there be spare parts included  with the equipment (obtain list and book value)?
  • Are there any market restrictions?
 


Appraisal Options

Answers to these questions provide the foundation for the asset valuation process. You will seldom have the answers to all of these questions, which means you need to develop the resources to get the information required to make an informed decision. Keep in mind that many times it is prudent to establish a price range that can be called upon as the marketing process approaches the disposal deadline.
 

According to the American Society of Appraisers, these are the priority options in the process:

  1. Reproduction Cost New is the current cost of reproducing a new replica of a property with the same or closely similar materials.
  2. Replacement Cost New is the current cost new of a similar new property having the nearest equivalent utility as the property being appraised.
  3. Fair Market Value is the estimated amount, expressed in terms of money, that may be reasonably expected for a property in an exchange between a willing buyer and a willing seller, with equity to both, and neither under any compulsion to buy or sell, and both fully aware of all relevant facts, as of a specific date.
  4. Fair Market Value in Continued Use is the estimated amount, expressed in terms of money, that may reasonably be expected for a property in an exchange between a willing buyer and a willing seller, with equity to both, and neither under any compulsion to buy or sell, and both fully aware of all relevant facts, including installation, as of a specific date, and assuming that the earnings support the value reported. NOTE: This includes all normal direct and indirect costs to make the property fully operational.
  5. Fair Market Value — Installed is the estimated amount, expressed in terms of money, that may reasonably be expected for an installed property in an exchange between a willing buyer and a willing seller, with equity to both, and neither under any compulsion to buy or sell, and both fully aware of all relevant facts, including installation, as of a specific date.
  6. Fair Market Value — Removal is the estimated amount, expressed in terms of money, that may reasonably be expected for a property between a willing buyer and a willing seller, with equity to both, and neither under any compulsion to buy or sell, and both fully aware of all relevant facts, as of a specific date.
  7. Liquidation Value in Place is the estimated gross amount, expressed in terms of money, that could typically be realized from a failed facility, assuming that the entire facility would be sold intact within a limited time to complete the sale, as of a specific date.
  8. Orderly Liquidation Value is the estimated gross amount, expressed in terms of money, that could be typically realized from a liquidation sale, given a reasonable period of time to find a purchaser(s), with the seller being compelled to sell on an as-is, where-is basis, as of a specific date.
  9. Forced Liquidation Value is the estimated gross amount, expressed in terms of money, that could be typically 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.
  10. Salvage Value is the estimated amount, expressed in terms of money, that may be expected for the whole property or a component of the whole property that is retired from service for use elsewhere, as of a specific date.
  11. Scrap Value is the estimated amount, expressed in terms of money, that could be realized for the property if it were sold for its material content, not for a productive use, as of a specific date.
  12. Insurance Replacement Cost is the replacement cost new, as defined in the insurance policy, less the replacement cost new of the items specifically excluded in the policy, if any, as of a specific date.
  13. Insurance Value Depreciated is the insurance replacement cost new less accrued depreciation considered for insurance purposes, as defined in the insurance policy or other agreements, as of a specific date.
Dominant Options

From the options above, most of the time you will be dealing with 8, 9, 10 and 11 (occasionally 7), which are the key market forces at work in most situations. Option 8. Orderly Liquidation Value – This will make up approximately 25 percent of the assets you sell. The market approach (sales comparisons – comps) will give you the best feel for the item’s value and its desirability. The key is to build a reference library to find the closest comps to measure your machine against (Internet.) If the comp is newer and in better condition, adjust the price of your machine down to reflect the difference in remaining useful life or up if the comp is older and in lesser condition. Remember, if you are using comps from dealer sales, you may want to adjust your comp down a few points if you think the dealer is providing some form of warranty. The answers to the questions above will help establish the item’s level of depreciation and its remaining useful life. Most used-equipment buyers are more concerned about how many hours a machine will run before it either needs major repairs or ceases to function
altogether. If comps are not available, the cost approach is the next best. That entails establishing the replacement cost and deducting all forms of depreciation, such as normal wear and tear, and functional and economic depreciation, and then adding back any capital rebuilds that would add to or extend its life.

 
Option 9. Forced Liquidation Value – This will no doubt make up the majority of the asset sales. This approach is used when you have a specific and tight deadline to meet for the disposal of the items. In most cases, the items are either sold through a broker to a dealer for resale or at public auction. In all cases, an auctioneer will most likely provide you with an appraisal of what he or she thinks will be the liquidation value. Most auction appraisals are conservative and can be marked up a few percentage points to get closer to the orderly liquidation value. If you have enough items for a large auction, you can normally get several auction companies to provide their evaluations for comparison.
Option 10. Salvage Value – There are times when the company does not want a particular machine to go on the market to make a product that will compete with its production, or the
sum value of the parts equal or exceed the value of the whole. In any case, you should forge an agreement with your clients. The parts they remove from the machine should be used within one year. If not, the parts should be sold and the revenue applied elsewhere. The general rule for the sale of used parts is 50 percent of replacement cost or less depending on condition.
Option 11. Scrap Value – This is probably the easiest to calculate: the weight of the recoverable materials less preparation and transportation to the market. Go to the Investment Recovery trade show and get acquainted with the scrap dealers and demolition companies.

They will be your reference guide and sounding board.
 
There are many technical specifications and other component valuation metrics to be taken into account for any given asset. This discussion is intended to provide an overview and perspective on the important issues and principles to be considered in asset analysis and
appraisal. To get comprehensive education on the broad scope of the operational techniques and details that are essential to be effective, take advantage of the Investment Recovery Association CMIR seminars on the topic and consider the certification course given by the American Society of Appraisers.
 
Learning how to properly appraise machinery and equipment for disposal is a critical discipline in maximizing surplus asset return on investment.
 
Reprinted from ASSET 2.0, the Investment Recovery Business Journal, Vol. 2, 2007

© The Investment Recovery Association