06 Apr Valuing Assets: Part 2
by George D. Abraham
CEO & Chief Appraiser
Business Evaluation Systems
When discussing hard assets, there are various categories such as Furniture, Fixtures and Equipment, Vehicles or rolling stock, inventory (both for resale and parts for everyday repairs), Leasehold improvements, as well as Licenses, Patents and Trademarks. Each category of assets has to be analyzed individually and some research is required. Keep in mind that in addition to the fair market value of each item, you may have to arrive at a “Value in Use” of the equipment. “Value in Use” is defined as: “The value of an economic good to its owner/user is based on the production (privacies in income; utility or amenity form) of the economic good to a specific individual. This is a subjective value however, and may not necessarily represent market value.”
When valuing Furniture, Fixtures and Equipment, several things can happen when trying to research the values. For instance, you will usually encounter two scenarios that stand out when calling used equipment dealers, sometimes auctioneers (although you are mainly looking for fair market value, in some cases auction value is the market), and trade association magazine classified ads as well as the owners own estimate and owners of similar businesses; one is that everyone seems to know the value of the various pieces of equipment or that no one can give you a straight answer until they see the equipment and its condition.
You can adjust the equipment on the Balance Sheet by adding to or deducting from depreciation to reflect the fair market value of the assets. This gives you an economic adjustment that is based on fair market value rather than a taxed based value as set forth by IRS schedules that are usually only for tax purposes and probably do not reflect the true value of the equipment.
The second scenario whereby, hardly anyone knows the value of the equipment until they see it is an indication that age, condition and model has a significant impact on value. Although each (including the owner) dealer or contact may not be sure what the equipment is worth, all will definitely know how long each piece of equipment will last. This is where the “Remaining Useful Life” (RUL) Method applies best. Again, keep notes as to who you talk to and their estimate of useful life of each piece of equipment. Based on a range of life expectancy, you can deduct a fair and reasonable life for each piece of equipment. The calculations are a simple mathematical method of re-doing the depreciation schedule that the accountant has used.
Sometimes you will find that the depreciation schedules the accountant has applied accurately represent the true life expectancy of the equipment and therefore do not need adjustment. This is usually true in hi-tech electrical or computerized equipment. In most cases this is not the case and a new depreciation schedule must be established from the research you have collected.
The above article was written by George Abraham, an experienced business broker who is now a well-known business appraiser. Since 1973, Business Evaluation Systems has been involved in the appraisal of over 16,000 companies, covering almost every industry on a national and international basis, ranging in value from $50,000 to over $7 billion. The firm provides third-party valuations as well. For more information go to: www.BESappraisals.com