How the Valuation of Machinery and Equipment Works
Although your business might have the greater worth, the value of the equipment used in it every day also plays into its value—sometimes significantly so. For this, and many other reasons, it can be incredibly useful to get a valuation of the machinery and equipment you use.
Below, we break down these reasons and what methods are used for appraising commercial equipment.
How the Right Valuation for Machinery and Equipment Is Chosen
Buying and Selling
Generally speaking, the most common reason for getting an appraisal for their equipment would be because you’re selling it or considering buying some new gear.
When buying or selling used equipment, the most common valuations are:
- Fair market value
- Orderly liquidation value
- Forced liquidation value
The one that’s used will depend on the situation surrounding the purchase or sale. For example, a run-of-the-mill transaction between two willing parties usually relies on fair market value, while liquidation value may be used when bankruptcy is the reason for selling.
Insurance Claims
When something breaks with insured equipment, an appraisal will often be used to get the specific value of it so it can be replaced properly.
The most common values in use for insurance purposes are:
- Actual cash value
- Replacement cost new
- Reproduction cost new
The value that’s chosen will actually affect the premium of your insurance and will therefore depend on your specific insurance policy for the equipment in question.
Continual Use
Even if you have no intention of buying, selling, or making a claim for your equipment, there’s still another instance when getting an appraisal makes sense. You may need to get a valuation of your machinery or equipment for financial reporting or as security for financing something.
The most common values for this “continual use” category for financial situations are:
- Fair market value
- Forced liquidation value
Of the two, fair market value is generally chosen, but banks may collateralize equipment based on their forced liquidation value.
What Methods Are Used in Equipment Valuation?
In much the same way commercial appraisals are done, so too do equipment and machinery appraisals use similar approaches for determining value.
Most of these appraisals will use one of the following methods:
- The sales comparison method
- The cost method
- The income method
For niche or unique equipment, the cost method is generally used more often as it focuses on the replacement of it and depreciation over time.
Overall, there are a range of valid reasons to get a valuation for machinery and understanding what your equipment is worth can help bring context to the financial side of your company.
