Blackbird specializes in conducting certified appraisals for inventory, machinery & equipment, on behalf of secured creditors and other professionals nationwide.
The two main concepts that drive an appraisal are the definition of value and the valuation method used. Typically, the value of collateral is determined using one or more of three definitions: forced liquidation value (FLV), orderly liquidation value (OLV), and various forms of fair market value (FMV). These definitions differ based on the time of the sales cycle; a forced sale is very short term (45-60 days), an orderly sale is slightly longer (3-6 months) and fair market sale is often void of a timeframe. These definitions all assume an arm’s length sale, with forced and orderly values assuming the seller is compelled to sell within the defined time frame, often under duress.
Additionally, there are three basic valuation methods used to determine value when conducting any appraisal: the cost approach, the sales comparison approach, and the income capitalization approach.
The cost approach is a set of procedures in which an appraiser derives a value indication by estimating the current cost to reproduce or replace the assets, deducting for all depreciation, physical deterioration, functional obsolescence, and external/economic obsolescence. The cost approach is derived from the principle of substitution; whereby a prudent buyer will not pay more for an asset than the cost of acquiring a substitute asset of equivalent utility elsewhere at a lower cost.
The sales comparison approach is a set of procedures in which an appraiser derives a value indication by comparing the assets being appraised to similar assets that have been sold recently, applying appropriate units of comparison, and making adjustments based on the elements of comparison to the sale prices of the comparable.
The income capitalization approach is a set of procedures in which an appraiser derives a value indication for income-producing assets by converting anticipated benefits into value. This conversion is accomplished in one of two ways: One is to capitalize a single year’s income expectancy (or an annual average of several years’ income expectancies) at a market derived capitalization rate (or cap rate that reflects a specified income pattern, return on investment or change in value of the investment); the other method is by discounting the annual cash flows for the holding period and the reversion at a specified yield rate (like the first was not complicated enough).
All three approaches are always considered and quite typical for any inventory or machinery and equipment appraisal. However, it is our experience that the sales comparison approach is the primary basis upon which these types of collateral are often valued. Due to the nature of some assets, market data may not always be available for reference. In these instances, the cost approach is given more weight in the value determination. The income approach is very limited in its application to the appraisal of machinery and equipment on a piecemeal basis. This is due to the difficulty in determining what portion of the total income and expense stream of a given business would be attributable to a specific piece of equipment. The income approach is often weighted more heavily in an inventory appraisal as the cash flows are more readily identified and predicted.
Blackbird conducts all of our appraisals in conformance with the Uniform Standards of Professional Appraisal Practice (USPAP) and within the guidelines established by the Association of Machinery and Equipment Appraisers (AMEA) and/or the American Society of Appraisers (ASA). Experienced appraisers with specific industry knowledge will inspect assets on location, noting vital descriptive information and production data that make the assets unique. Final reports are authoritative and include a detailed listing of the appraised assets.