The purpose of the appraisal, along with the type of value definition, determines the criteria the appraiser considers in developing the valuation opinion. Since clients often have questions about the value of assets under various circumstances and conditions we have compiled a list of the most common value definitions.
Fair Market value in Continued Use (with assumed earnings)
"Fair Market Value in Continued Use is an opinion, expressed in terms of money, at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts, as of a specific date and assuming that the business earnings support the value reported, without verification."
Fair market value in continued use is the most encompassing value definition because assets are valued to include installation and assemblage costs and the costs to make the asset fully operational. The appraiser assumes the company's earnings support the equipment value.
Equipment that does not produce income is not as valuable as equipment that makes money. If a higher level of assurance is required, a more appropriate value definition to choose might be "Fair Market Value in Continued Use with Earnings Analysis."
A company's profitability may heavily influence the value of equipment in continued use. Many machinery and equipment appraisers are not skilled or trained to perform earnings analysis, that's why their reports are based on assumed earnings. If there is concern, we recommend our clients conduct further investigation or engage us to prepare an Earnings Analysis in connection with the appraisal.
Fair market value in continued use is the most commonly used value definition where liquidation circumstances are not required or anticipated and is typically used in business valuation, divorce settlements, retirement planning, litigation support and income tax reporting.
Orderly Liquidation Value
"Orderly Liquidation Value is an opinion of the gross amount, expressed in terms of money, that typically could be realized from a liquidation sale, given a reasonable period of time to find a purchaser (or purchasers), with the seller being compelled to sell on an as-is, where-is basis, as of a specific date."
The orderly liquidation value is the value received when the assets are sold piecemeal over a predetermined period of time (often three to six months). It is assumed the assets are properly advertised and that the buyer is responsible for all removal costs. The assets are sold without warranties or representation as to condition. If a buyer and seller cannot negotiate an acceptable price during the time period specified, the final option would be to offer the assets at a public auction.
Forced Liquidation Value
"Forced Liquidation Value is an opinion of the gross amount, expressed in terms of money, that typically could be 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."
Often times referred to as "Quick Sale", forced liquidation value is the value received when assets are sold piecemeal at public auction. The buyer is responsible for the costs of removing the equipment and the seller makes no warranty or representation as to the condition of the assets. It is assumed the assets are properly advertised in a manner that is commercially practical and economically reasonable.
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Having a realistic understanding of the value of your business or the value of your shares in a business is critical to personal decision-making and planning.