Preservation of Value vs. Value Enhancement: What does money spent mean to value?

By John Hagist
Controller, VP Appraisal Services
(773) 496-5744
johnh@loebequipment.com

Fixed asset registers are an interesting list. Every time a business makes a purchase, the decision needs to be made if the purchase is being capitalized and subsequently added to the fixed asset register, or if the purchase is expensed, thereby having an effect on the P&L of the business. The Sarbanes-Oxley act (particularly sections 302 and 404) added to each businesses decision making process.

When Loeb Appraisal is engaged to perform a valuation on a facility, the facility will often send over their fixed asset list so that there’s a mutual understanding of the overall facility and the scale and scope of assets involved.

These lists can be both helpful and misleading at the same time.

Recently, we’ve encountered experiences where prior Loeb appraisals have been used for purchase price allocation purposes and where the appraisal list has been uploaded into the fixed asset register software. After a month or two, the next purchase on the register reads as “Replacement Motor” at a cost of $7,500. A machine already on the list has a motor that is now being replaced? When the purchase is a maintenance-related expenditure, it is NOT an enhancement to value but rather a preservation of the original value.

In simpler terms, if you buy a $10,000 used car and get into an accident where repairs will cost you $4,000 to fix it to pre-accident conditions, the car isn’t valued at $14,000, it’s still just a $10,000 car. This is the fallacy that often occurs with assets in these registers.

When a company purchases a new or used piece of equipment for $75,000 (as an example) they capitalize the purchase and add it to the register. They put it into service and begin using it. Throughout its use wear parts and service are purchased and expensed as “Preventative Maintenance” or “Cost of Goods” expenses. A replacement motor is purchased and added to the fixed asset registry. Is any consideration being made to expensing the balance of the cost of the motor that is being replaced? In short, usually not…

Change parts are also interesting because they often cost quite a bit but do not always have as large a value from the appraisal perspective especially when the dies or parts are customized or specific to the product being produced. There is little to no resale value if it can’t immediately be put into service for another end user.

Fixed asset lists need to be read and reviewed with a critical eye and understanding that there is not a straight translation into current market value regardless of the definition of value the appraisal is opining on.

Equipment valuations for industrial facilities of all sizes!

Contact Loeb for all your Appraisal needs!

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Idle, Seasonal, or Truly Surplus: Equipment Bone Yards are not Bank Accounts

By John Hagist
Controller, VP Appraisal Services
(773) 496-5744
johnh@loebequipment.com

Recently Loeb Appraisal has been fielding the following question as it pertains to equipment valuations: What, in the appraisers opinion, is truly surplus equipment versus idle or seasonally needed equipment?

Traditionally, appraisal clients request gross value regardless of whether it was gross forced liquidation value (FLV) or gross orderly liquidation value (OLV). The logical progression, dictated by the late 2000’s, is that clients have now started requesting net values and want to see the calculations to understand how net values were achieved. This came from when liquidation occurred and no one was “achieving” the reported appraised opinion of value. Net values have helped tighten that range considerably.

Every manufacturing facility has some amount of surplus, idle, and/or seasonal equipment. The question then becomes: does the facility need this equipment for ongoing business purposes or is the equipment being retained so it can be leveraged?

Our financial clients are straight forward with the facilities and maintain the position there are no issues with a standard advance rate on necessary idle or seasonal equipment, but they are not always prepared to advance at the same rate on truly surplus equipment.

This “bone yard” of assets is only getting older and continues to lose value. Better that it is turned into cash now as opposed to later. This discussion is an open process with both the facility and our client. Often times there is a difference of opinion in terms of these assets that need to be discussed and worked through.

Loeb Appraisal has the ability to work through these issues with the facility. Our day-to-day involvement in the marketplace is critical when it comes to true asset valuations. With Loeb as an active participant in the market from multiple disciplines, our appraisals are based on actual transactions of buying, selling, financing, and auctioning industrial assets. We apply these real world values and analysis to our approach.

The more questions asked, the more knowledge that can be obtained from an equipment appraisal. Always ask!!! Our goal is always to make the assets within the appraisal as accurate and clearly defined as possible for our clients.

Equipment valuations for industrial facilities of all sizes!
Contact Loeb for all your Appraisal needs!

Learn More About Loeb Appraisal ›

As a Lender, Where Are You Entering the Value Curve When Lending on Machinery & Equipment?

Recently, when discussing value trends with a group of lenders, the following question was raised:

"From a collateral perspective, is it more secure to lend X percentage against used equipment than on new equipment because of there being less dissipation of value over time?"

At Loeb, we agree with the statement. Another lender in the room indicated he didn't follow, he stated:

"New equipment is new, therefore more valuable."

His statement is true on day one, but that can quickly change.

For example, a machine costs $100 brand new and its FLV at one year is $65. The lender advanced 100% of the new cost on a 5 year note. The outstanding loan value at the one year mark is approximately $85. The loan to value is 1.31.

A machine costs $75 used and its FLV at one year is $65. The lender advanced 100% of the used cost on a 5 year note. The outstanding loan value at the one year mark is approximately $63. The loan to value is 0.97.

This is the reason that lenders who issue leases/loans on new equipment for 3 or 5 years recognize they are underwater from a value perspective for the first period of their loan. That is the cash flow/ability to pay component of the underwriting credit decision.

Both new equipment and used equipment can be secure collateral. The understanding needs to be in place that, when looking at the opinion of value curve, at what point is the lender joining the curve? The higher up the curve (meaning the newer or new equipment) will dissipate more value than a similar used unit that starts at a lower value.

Understanding value today is critical. Understanding where that value is going is just as critical.

For more information on Loeb Appraisal or to speak to a representative regarding Equipment Valuation, contact info@loebappraisal.com or complete our Appraisal Services Form and an appraisal specialist will contact you.

Equipment valuations for industrial facilities of all sizes!Contact Loeb for all your Appraisal needs!

Learn More About Loeb Appraisal ›

Understand Your Asset Values with a Certified Market Appraisal from Loeb Appraisal

Loeb Appraisal specializes in appraising machinery and equipment within the food, pharmaceutical, cosmetics, and chemical industries. Our certified market appraisals give our customers clear insight to the value of their capital assets.

Loeb's expertise in the field comes from our direct experience in buying and selling quality used machinery and, unlike others in the industry, our appraisal values are based on actual historical transactions.

Loeb Appraisal's certified market appraisals help companies and financial partners gain insight in situations involving:

• Asset-based lending and procurement of financing
• Acquisition cost allocation
• Lease end negotiations
• Partnership formulation or dissolution
• Mergers and acquisitions
• Litigation
• Property tax issues
• Risk management

For more information on Loeb Appraisal or to speak to a representative regarding Equipment Valuation, contact info@loebappraisal.com or complete our Appraisal Services Form and an appraisal specialist will contact you.

Equipment valuations for industrial facilities of all sizes!  Contact Loeb for all your Appraisal needs!

Understanding Costs Versus Values

Beware: High rates of customization will not always pay off in terms of valuation

Recently a banking client contacted Loeb Appraisal in need of valuation for a newly installed computerized conveyor system. They required an opinion of value to include both a Fair Market Value In Place definition, as well as, a Forced Liquidation Value definition. This prompted a lengthy conversation and discovery period as the overall costs of the system was $4,000,000, but there was no breakdown from the lender's client the document hard costs (the actual cost of the conveyor system) versus the soft costs (labor, installation, and programming).

This scenario presents a unique situation wherein there will be a large differential of values between the FMV IP definition of value and the FLV definition of value. Opinions of value under Fair Market Value In Place for these types of scenarios are typically very straight forward. The actual total cost for the recently installed system is a known value. However, the Forced Liquidation Value is quite a bit different. The soft costs play a large factor in the final valuation as these unrecoverable costs cannot be incorporated into a Forced Liquidation analysis. In Place, the values are retained, but under the Forced Liquidation Value scenario, they will not.

The result of this engagement was an opinion of FLV being merely 10% of the overall cost. From the FLV perspective, both our banking client and their borrower agreed with our analysis. The time factor that is inherent with the definition of FLV is critical to keep in mind in these scenarios. What are the hard and soft costs, what the value is on the books, what the current value of the assets are – these factors impact the analysis and the final opinion of value.

Our day-to-day involvement in the marketplace is critical when it comes to true asset valuations. With Loeb as an active participant in the market from multiple disciplines, our appraisals are based on actual transactions of buying, selling, financing, and auctioning industrial assets. We apply real world analysis to our approach.

Achieving Consistent Results Through Our Proven Process

Loeb is divisionally agnostic. Regardless of why we are looking at an industrial asset, Loeb always looks at the equipment in a consistent manner.

Are you looking to sell equipment, auction your plant or are in need of an appraisal? Our clients get the benefit of knowing that regardless of why we are being asked to look at the facility or equipment. The benefit of our knowledge and expertise is applied consistently.

This is our cross-divisional approach. We have numerous clients who throughout our relationship we have performed multiple services: performed appraisals, sold equipment, bought equipment, conducted auctions, and also financed.

At it's core, Loeb Appraisal's Proven Process can be broken into just a few key steps (click on the graphic above for detailed information):

• Appraisal Requested
• Executed Engagement Letter with 2, 3, or 4 week Turnaround (depending on type of appraisal requested)
• Inspection
• Research & Opinion
• Asset Verification & Internal Peer Review
• Final Review
• Final Appraisal Report
• Quarterly Check-in

We meet our clients expectations not only because of our knowledge and expertise, but also because of our Proven Process.

Equipment valuations for industrial facilities of all sizes!

Contact Loeb for all your Appraisal needs!

Your partnership with Loeb has made our contribution to the Red Cross possible!

Happy Holidays and Happy New Year!

Your partnership with Loeb has made our contribution to the Red Cross possible!

During this Holiday season we wanted to take a moment and express our appreciation.

In today's world you can't be successful without others and we wanted to take this time to thank you for your support of us and we hope that you feel we have been equally as supportive to you.

For the last 5 years instead of giving out small trinkets as a sign of our appreciation, we have been making donations to worthy causes to help make our world a better place.

This November, a massive storm system swept through the Midwest, leaving widespread destruction in its wake. Hundreds of thousands were affected by these storms including friends and family of Loeb employees.

We wanted to help with the ongoing support of Southern Illinois this holiday season as they continue to recover and rebuild. By donating to the Red Cross, we are mobilizing relief workers and helping to stock shelters with greatly needed food and supplies.

We are grateful to you, our customers and partners, for your continued business and we hope you appreciate being a part of our support of the Red Cross and their efforts to bring assistance to those deeply affected by the storm.

We Wish You a Wonderful Holiday Season

& a Happy New Year!