Machinery and Equioment Valuations
March 6, 2017
What Business Leaders Should Know about Machinery and Equipment Valuations
Why a Machinery and Equipment Valuation?
A company should obtain a valuation when they are seeking to prepare to sell or purchase machinery and equipment (M&E). Machinery and equipment occupy a large portion of any business. Examples of M&E include, but are not limited to, machinery, furniture, fixtures, office, telecom, computer equipment, and vehicles. Valuing such assets can be very different from the traditional valuation methodologies, due to the current state of the asset or usage of the asset.
Obtaining a valuation can also be helpful as part of an M&A transaction for due diligence and will influence the amount of goodwill that will eventually be booked in the transaction. Goodwill is the excess of the purchase price of a company over its book value which represents the value of goodwill as an intangible asset for accounting purposes. For banks, the value of the hard assets can represent a floor of liquidation value in the event of default.
What if I don’t get the machinery and equipment valued?
There are many reasons why a machine and equipment valuation may be required. Some of these reasons include selling M&E, becoming properly and fully insured, wanting to purchase additional equipment, or simply valuing your company’s net worth. Most people commonly overlook the real value of machinery and equipment and in most cases the value is much lower than its historical purchasing cost. This is due to depreciation. Depreciation in terms of machinery and equipment is an estimated loss in value over a determined useful lifetime. This depreciation is usually due to lack of functionality or physical deterioration. Note that depreciation for accounting purposes may not align with the real or economic depreciation that has taken place over the life of an asset.
How do I select a valuation firm?
Having a valuation firm appraise your machinery and equipment gives a third-party opinion which is appropriate for financial reporting and tax purposes. The valuation firm should be proficient in the latest thought processes and guidance on M&E valuation methods as well as traditional valuation methods. The analysts and senior management should be up to date with current industry standards.