Equipment Valuation for Buying a Business
For many companies, equipment represents a significant portion of the business’s overall value. When purchasing a business, it is essential to accurately value equipment and machinery. An equipment valuation for buying a business can assist in identifying fair prices. It can also influence loan approvals and overall return on investment.
In this article, we share the benefits of an equipment valuation for buying a business. We also detail common red flags and how to use the valuation in your business plan.
At Peak Business Valuation, we conduct hundreds of equipment appraisals annually. Our team includes CMEA-certified appraisers who can help determine the value of your business’s equipment. To learn more, schedule a free consultation below.
Why Equipment Valuation Matters When Buying a Business
In certain transactions, business acquisitions are structured as asset sales rather than stock sales. In an asset sale, the buyer acquires specific components that help operate the business. Examples include customer lists, goodwill, inventory, and tangible assets like equipment.
Since equipment is often one of the most valuable assets transferred in an acquisition, buyers, sellers, and lenders need to understand its true worth. Buyers often focus on metrics like EBITDA multiples and revenue trends, but lenders typically require a professional equipment appraisal to validate the asset values being financed. A professional equipment valuation for buying a business also holds legal credibility if needed for negotiations or disputes. Ultimately, an inflated equipment value may lead to loan denial or reduced financing, while undervaluing equipment could result in overpaying for the business or missing tax and depreciation benefits.
Valuation Approaches for An Equipment Valuation
When valuing equipment, professional appraisers like Peak Business Valuation apply a combination of the standardized valuation techniques: the asset, market, and income approaches. Below, we discuss how equipment appraisers determine the fair market value of equipment using these valuation approaches:
1. Asset Approach:
The asset approach estimates value based on replacement cost, minus depreciation from use and age. This valuation approach is most useful when comparable market sales are limited.
2. Market Approach:
The market approach for equipment valuations estimates value by comparing similar pieces of equipment that recently sold. This approach reflects current market conditions and is most reliable when there is sufficient comparable data available.
3. Income Approach:
The income approach estimates value based on the potential future cash flow the equipment can help generate. This valuation approach is rarely used for individual pieces of equipment. However, it can be suitable for specialized machinery whose value depends on the income it produces, like medical imaging machines.
Common Types of Value
Understanding the common types of equipment value is essential when buying a business. These valuation standards help you determine what the equipment is truly worth, navigate negotiations, and ensure financing aligns with the assets’ actual market value. Below are the primary value types used in equipment appraisals:
Fair Market Value (FMV):
- Fair Market Value is the hypothetical price that a willing buyer and seller would agree upon under normal conditions.
- This standard is often required for SBA loans and most private financing.
Orderly Liquidation Value (OLV):
- The Orderly Liquidation Value is the return expected from an orderly sale of equipment, typically within 90–180 days.
- Orderly Liquidation Value is often 60–80% of FMV.
Forced Liquidation Value (FLV):
- Forced Liquidation Value is the amount realized in a rapid or auction-style sale of equipment.
- Because it is a faster process, Forced Liquidation Value is often 20–40% of FMV.
If you are in need of an equipment valuation for buying a business, Peak Business Valuation provides comprehensive and accurate assessments. You can reach out and ask any questions you have about equipment value and buying equipment. Contact Peak Business Valuation today to schedule your free consultation.
Red Flags That Can Reduce Equipment Value
When valuing equipment for a business purchase, it is important to be aware of key factors that can reduce value. This helps buyers make informed decisions to mitigate risk during due diligence. Below is a list of potential red flags to look for when buying equipment:
Leased Equipment Presented as Owned:
- Leased items may not transfer with the sale because they are not actually owned by the business.
Outdated or Obsolete Technology:
- Fully depreciated equipment may have limited remaining usefulness. Moreover, if it is no longer in demand, its market value may be minimal.
Lack of Maintenance Records:
- Missing maintenance records create uncertainty about equipment condition. This often leads to a lower valuation.
Environmental Risks:
- Certain equipment may carry compliance or disposal obligations to protect the environment. These costs can reduce the asset’s net value.
Excessive Customization:
- Highly customized machinery or branded vehicles may not appeal to the broader market. As a result, resale potential can be significantly reduced.
Recognizing these possible red flags can help you better understand factors that influence equipment value. Keeping these considerations in mind supports informed decisions when buying a business.
Online Equipment Appraisal vs. Professional Equipment Valuation
Online resources are a budget-friendly option to get an initial estimate of equipment value. However, SBA lenders and other financial institutions rarely accept self-prepared valuations for transactions. Working with a certified machinery and equipment appraiser (CMEA) or ASA-accredited professional is essential.
Final Thoughts
An equipment valuation for buying a business brings clarity to some of the most important components of a transaction. Understanding equipment valuation approaches, common types of equipment value, and potential red flags can help you make strategic decisions when buying a business. In addition, a professional equipment appraisal provides reliable documentation that supports negotiations, financing discussions, and long-term planning.
Peak Business Valuation offers comprehensive equipment valuations to help buyers navigate the acquisition process with clarity and confidence. Reach out today to schedule a free consultation and learn how our certified appraisers can support your transaction.
