Machinery White Paper Jan 2016

The Importance of Machinery and Business Assets Valuation in a Lending Environment

© Cavendish Maxwell 2016 | www.cavendishmaxwell.com © Cavendish Maxwell 2016 | www.cavendishmaxwell.com 32

Machinery and Business Assets Valuation Services

1. Introduction

2. Mistakes banks and lenders often make

3. When it all goes wrong

4. Approaches to an appraisal

5. Methods of reporting

6. Cavendish Maxwell

Content



Do you need to know the value of equipment and machinery to secure existing loans?

Are you looking to take a new loan against business plant, machinery or equipment?

Is there a chance that your machinery or equipment loans are under collateralised?

IntroductionMistake 1: Relying on the depreciation schedule

The depreciation schedule is only important to the business owner and the authorities. It does not provide the fair market value, orderly liquidation or forced liquidation value. This method leaves you exposed to liability and risk.

Mistake 2: Self Estimating values

Self-estimating, assuming or simply “guessing” at values is filled with liability and risk. The loan file will not contain the substance required to support a loan decision. A certified valuer delivers an independent, comprehensive appraisal report that is irrefutable, defensible and withstands scrutiny because it is based on comparables and market research.

Mistakes banks and lenders often make

1. 4.

2. 5.

3. 6.

Are you becoming more “asset minded” due to cash flow and the current economic times?

Is repossession inevitable and you need to know how much each item can fetch in today’s market?

Is it time to liquidate the assets of a business?

If you answered “yes” to any of these questions, you are in need of an independent certified machinery and equipment report, prepared by a qualified surveyor.

Mistake 3: Relying on the word of an “uncertified” person to deliver a value on equipment

Auctioneers and machinery and equipment dealers may have other agendas, so beware if the individual does not have certification. You will be putting yourself at risk of receiving an unsubstantiated equipment appraisal, opening you up to potentially increased costs and liability.



Market Approach

This approach is considered the preferable approach and can be used for assets that are traded in open markets. Everyone is familiar with this approach for buildings however it can also be used for mobile plant and machinery such as trucks or excavators, as well as for some fixed assets.This method considers recent transactions of machines that are similar to the subject asset being appraised. It may also look at the offering prices of similar pieces of equipment. When exact machinery and equipment comparables are not found, adjustments are made to the selling or offering prices to equate them to the one being appraised.

This method is not typically used when the asset is “unique”. Some of the factors that are considered when comparing the subject machine to a comparable include: manufacturer, model, effective age, condition, capacity, price, time of sale, type of sale, location and accessories, amongst other characteristics.

Equipment valuers adjust comparables to include the direct and indirect installation costs when the asset is in continued use or installed.

Machinery and equipment appraisals using the market approach have direct market data to support the conclusion of the valuer.

This approach is the most reliable when there is sufficient data available of similar machinery and equipment that has sold or is being offered for sale, and ensuring the sources of the data are reliable is an important step in the process. The used equipment market which consists of dealers, auctions, and public and private sales is a source for some of the data, with transactional databases typically used for developing an opinion of machinery and equipment value.

Approaches to an appraisal

When it all goes wrong…

Lender relies on book value

Findings:

• Loan generated on the basis of a book value of assets.

• Loan goes into default and is eventually recalled.

• Assets sold to recover monies but sale only recovers a fraction of the default amount.

Result:

• Bank lender suffers large loss on the loan.

Valuation for a bank who had lost track of assets

Findings:

• Asset invoices had been altered or forged, with no such supplier company existing in two cases.

• Machinery alleged to be multiples was in fact a single machine transported between sites.

• Machinery alleged to be new was in fact 8-10 years old.

Result:

• Revaluation was for one quarter of the original loan agreement.

• Settled on court steps.

Sale of assets for a company placed in hands of receiver

Findings:

• Assets valued by an uncertified party.• Receiver goes to auction.• Assets catalogued and listed for sale.• On the day of sale, arguments between

finance companies and banks over ownership due to several machines not being refinanced.

Result:

• Sale cancelled.

Onsite appraisal report

• An appraisal report is typically utilised for estimating the value of machinery and equipment for lenders, accountants, lawyers and business owners.

• Detailed description of onsite inspection and key features are included.

• Single number value expressed for each asset and the aggregate is reported as a single value encompassing all of the equipment in the appraisal.

• Photographs included.

Desktop appraisal report

• A desktop appraisal report is typically used to determine value at a lower cost, without the expense of an onsite inspection and detailed analysis of the condition of the machinery and equipment. Like most things in life, you get what you pay for, and as such a desktop appraisal has limited benefits.

• The valuer works from pictures and a brief description of each asset to provide a value based on this information.

• This valuation is not normally accepted by banks and many other parties due to professional standards.

Methods of reporting

Cost Approach

The cost approach to machinery and equipment appraisal involves the valuer coming up with the replacement cost of the asset and then subtracting any value that has been lost due to economic obsolescence, functional obsolescence, or physical deterioration.

The best starting point of determining the cost approach value is to identify the replacement cost new.

Replacement Cost New

Replacement cost new is what it would cost to acquire a machine that performs the equivalent function of the piece of equipment being appraised. One way of calculating the replacement cost new of machinery and equipment is to gather the detail of the direct and indirect costs to having the machine running, assuming that this is how the machine is being requested to be analyzed for the appraisal.

Direct costs include the cost of the equipment, direct labor for installation, freight, utility hook-ups, foundations, necessary sales tax, amongst other expenses. Indirect costs include engineering, administration, licenses, and other related set-up and typical acquisition expenses.

Economic Obsolescence

Economic obsolescence is the loss of value of an asset due to outside factors. These factors may include law or ordinance changes, increased cost of raw materials, labor, utilities, financing ability, or changes in the industry. These economic obsolescence factors which are external to the asset and business may affect the value of the machine or piece of equipment.

Functional Obsolescence

Functional obsolescence is the loss of value of machinery and equipment due to not meeting the standards of more efficient and less costly replacements.

Equipment valuers often see functional obsolescence when assets have seen technological advancements.

Physical Deterioration

Physical deterioration is the loss of value due to wear and tear on machinery and equipment. Machinery and equipment is manufactured with a life-cycle in mind.

As the machine is operated, the machine experiences physical stress and exposure to the elements of the environment. Over time, to continue with optimum output and performance, the machine will require additional maintenance expenditures.

Failure to maintain equipment with the correct servicing may lead to faster deterioration. It is usually estimated as a percentage with a brand new piece of equipment having 0% physical deterioration while a machine that has used up all of its life 100% physical deterioration. Measuring physical deterioration is often subjective and the valuer will rely on their experience of valuing similar assets and how they have performed in the past as the basis of calculating the percentage for the asset in question.

Principle of Substitution

The general premise of the cost approach in machinery and equipment appraisals is the principle of substitution. The principle of substitution means that someone will not pay more for the asset being appraised than what the individual can purchase a substitute asset that performs the same function or service.



Our services

Our team places great emphasis on technical expertise, professional integrity and long-term client relationships, providing comprehensive valuation reports widely accepted by banks, insurance companies and private clients, relied upon for mortgage security, machinery audit, business mergers and acquisitions, due diligence, insurance pre-loss cover, insolvency, accounting compliance, litigation, fixed asset register compilation, inheritance and succession planning purposes.

Our expertise enables us to tackle assignments across every business sector throughout the region and beyond.

Machinery and Business Asset Valuation Services at Cavendish Maxwell

Robert Knowles | Director at Baker Tilly

We have been using the valuations team at Cavendish Maxwell for machinery and equipment valuations for a number of years.They always provide excellent reports and continually maintain a professional and efficient service.

Specialist areas

Industrial

Utilities

Fixed asset management

Primary production

HealthcareInfrastructure

Commercial

Insurance

H

Loan security

Due diligence

Mike Kenyon MRICS AAPI CPV (P&M)Partner Head of Machinery and Business AssetsM: +971 56 934 0078 E: [email protected]

John-Paul Messenger BE (Mech) AAPI CPV (P&M)Associate Machinery and Business AssetsM: +971 56 360 3552 E: [email protected]

Dubai office

2205 Marina PlazaDubai MarinaP.O. Box 118624DubaiUnited Arab Emirates

T: +971 4 453 9525 E: [email protected]

Abu Dhabi office

1006 Corniche Bakery BuildingAl Firdous StreetTourist Club AreaAbu DhabiUnited Arab Emirates

T: +971 4 453 9525 E: [email protected]

CavendishMaxwell.com

PROPERTY SERVICESMIDDLE EAST & AFRICA

Commercial Valuation • Development Advisory and Real Estate ResearchResidential Valuation • Project and Building Consultancy Investment and Commercial Agency • Hotels, Hospitality and Leisure

Also contact us for:

Documents

Machinery White Paper Jan 2016