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Business Equipment Appraisals – A Guide To The Market Approach

Business Equipment Appraisals For SBA – A Guide To The Market Approach

 

Selling your business equipment can seem daunting, especially when you have SBA (Small Business Association) requirements you must meet. But, it doesn’t have to be! This quick guide will walk you through the basics of how an appraiser will value your equipment for the SBA, what to look for in a great appraiser, and the questions that should be answered in the appraisal process.

If you’re looking to sell your business equipment and the value of your equipment is $250,000 or more, then you’ll need to determine a Fair Market Value for your assets. You’ll use what is called the Market Approach to establish the value of those assets. You’ll also need 2 Certified Business Equipment Appraisers to determine what your equipment is worth in the current market. 

First, we’ll review how to establish a Fair Market Value. The SBA requires a Standard of Value for your equipment when you plan to sell. This SBA value is determined by the Fair Market Value, which is met when the criteria below have been found: 

 

You have established:

  • A Hypothetical, Willing Buyer and a Willing Seller
  • An Arm’s Length Transaction
  • There is No Compulsion to Buy or Sell
  • All parties involved are Knowledgeable Parties

 

Fair Market Value is defined as “the price 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.” – wikipedia

An Arm’s Length Transaction is defined as “a business deal in which buyers and sellers act independently without one party influencing the other. … In the interest of fairness, both parties usually have equal access to information related to the deal.” – investopedia

Your Certified Appraiser will be able to help you efficiently determine these values. The best appraisers are able to walk you through this process and move into the next step required by the SBA in determining your equipment value, which is known as the Market Approach.

 

What is the Market Approach? The SBA has 3 Accepted Business Valuations when determining the worth of a business and it’s equipment. 

  1. Income Approach
  2. Cost Approach
  3. Market Approach

 

Each approach uses multiple variables and value methods based on the specific type of appraisal being implemented. The Market Approach compares your equipment (also referred to as the subject entity) to similar equipment that has been sold in the current open market. 

We’ll use a woodworking business as a brief example of how a Comparable Transaction is selected and some possible variables used in determining your equipment value. 

This is great information for you because it gives you an idea of what to expect from a top-notch appraiser. The best appraisers will find the closest comparisons available, using an expanded version of the variables below. 

 

Business

Woodworking Company

Variables

  • Industry codes related to woodworking tools and machinery
  • 500+ transactions
  • Revenue ranging from $55,000 to $5,000,000
  • Dates ranging from 1999 to present
  • SDE (Seller’s Discretionary Earnings) ranging from $300,000k to $2,000,000

So, what should you look for in a Certified Business Equipment Appraiser? And why do you need two? FIrst, let’s explore what an appraiser actually is and why they are so important.

 

What is an Appraiser?

Appraisers are independent operators who prepare a business valuation or value business assets, using financial analysis, in-person reviews, and industry comparisons.

Certified Appraisers meet strict standards established as Universal Standards of Professional Appraisal Practice (USPAP). A certified appraiser, has completed and passe the USPAP course. Appraisers are certified and licensed by their respective state regulatory boards.

 

Why do you need an Appraiser? 

When preparing to sell or buy large business equipment, the SBA requires 3rd Party Appraisers to provide estimated values of the property. A quick example: In an equipment sell-off for a business that is closing, an appraiser provides an unbiased and expert estimate for the value of the equipment.

Using 2 Certified Business Equipment Appraisers will help you to determine a “reasonableness check”. When working to find the value of your equipment, a second opinion may be very valuable to show that you have done due diligence in proving your Standard of Value.  

So, what are the questions you want to answer when setting the value of your equipment? Here are some of the most important considerations you want to take into account. 

  • Have your pieces of equipment been individually appraised at fair market value?
  • Has there been due diligence committed to selecting comparable equipment?
  • Are those findings consistent with the industry trends related to your equipment?  
  • Is there solid support for the valuation approaches your appraiser has used? 
  • Have the local and national economic and industry trends been determined?
  • Are there any anomalies in the value approaches, and have they been discussed?
  • Have assets not related to your equipment been separately appraised?
  • Has the appraiser interviewed the related parties, to discuss those high-level trends?
  • Has the appraiser reviewed the low-level valuation items that may impact your values?
  • Has your appraiser explained the “why” behind the valuation as opposed to the “what”?

 

Just because there appears to be a large number of questions your appraiser is accountable for, over-explaining is not the best approach. More is not always better. Long, drawn-out documents don’t ensure high-quality results. The Standard of Value that your appraiser reaches should be concise, thoroughly vetted, and to the point.