Asset Management Associates
FMV & OLV—More than what Meets the Eye
by Michelle Vervake
More commonly, it seems the terms FMV and OLV are nearly a house hold name in the equipment industry. All too often are these value concepts used in a general sense. This along with the lack of information as to the purpose for the request of an FMV and OLV appraisal may result in a theoretical misunderstanding between the client and the appraiser. Especially if the client merely uses the values for reporting purposes and fails to read the content of the appraisal.
It is essential for the appraiser to know and understand the purpose of an appraisal. Knowing the purpose of the appraisal allows the appraiser to establish the report asset content, the limiting conditions, or any other parameters which will lead to a proper value analysis. In many cases, the appraiser will choose which value concept that best suites the purpose. For example, a bank client requests an inspection and appraisal of an extremely large CNC milling machine that is installed at the debtor’s location. The request from the client simply states, “inspect and provide the FMV & OLV of subject asset”.
Below are definitions of several value concepts that could be used based upon the following scenarios. However, if the appraiser is not cognizant of the intended use of the appraisal, it is clear to see how the value analysis will not employ the proper theoretical and practical considerations necessary to arrive at a valid conclusion. In addition, if the appraiser chooses the value concept due to lack of information from the client, the value analysis will not be clear to those who do not read the report and understand the basis of conclusion.
Fair Market Value (FMV)
Fair Market Value (FMV) is an opinion of the amount, expressed in terms of money that may reasonably be expected to exchange between a willing buyer and a willing seller with equity to both, neither under any compulsion to buy or sell, and both fully aware of all relevant facts, as of a certain date.
Fair Market Value In-Place-In-Use (FMV In-Place-In-Use)
Fair Market Value In-Place-In-Use (FMV In-Place-In-Use) is an opinion, of the fair market value of an item including installation and the contribution of the item to the operating facility (and) presupposes the continued utilization of the item in conjunction with all other installed items. Fair Market Value – Removed (FMV-Removed): is an opinion of the amount, expressed in terms of money, 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, considering removal of the property to another location, as of a specific date.
Orderly Liquidation Value (OLV)
Orderly Liquidation Value (OLV) is an opinion as to the amount, expressed in terms of money, of gross proceeds which could be expected from the sale of the appraised assets, held under orderly conditions, given a period of time in which to find a purchaser(s) considering a complete sale of all assets, as is, where is, and all sales made free and clear of all liens and encumbrances.
Forced Liquidated Value (FLV)
Forced Liquidated Value (FLV) is an opinion of the estimated gross proceeds which could typically be realized at a properly advertised and conducted public auction held under forced conditions, and under present day economic trends. The gross dollar amount does not account for the auction or other sale related expenses.
Back to our CNC Machine, the following scenarios beg different appraisal purpose, concept, approach and values:
1) A replevin has been ordered on subject. Because there may be time to locate a buyer until the relief from stay is granted, we might suggest FMV-Removed and OLV as a good value range. In most cases, machine tools that can be shown and demonstrated under power, will typically result in a gain of 20% – 30% in net proceeds. Disassembly, removal, freight and storage costs are extremely high with this type asset and must not be overlooked. In fact, in some cases, the plant or building was constructed to accommodate the machine and may require renovation after removal.
2) A receiver has been assigned to handle bankruptcy proceedings with a limited amount of time to remove the asset. In this case, without the luxury of time to locate a buyer, demonstrate under power, and negotiate removal and storage costs, a Liquidation Value would be most appropriate.
3) The machine is being appraised for the sale of the business. In this case, we suggest FMV-In Place for continued use. On the average, a sale in place offers the best recovery. When appraising machinery and equipment, the two most common approaches to the valuation process are The Market Approach and The Cost Approach. The Market Approach takes into account recent sales, comparable offerings and real time bids. The Cost Approach “measures value by determining the current cost of an asset and deducting for the various elements of depreciation, physical deterioration and functional and economic obsolescence.” Many times, the bank client will ask the original vendor or manufacturer their opinion of what the asset is worth. It is strongly suggested to get a written response with clarification as to which value concept and value premise they used. In addition, ask whether they would be willing to buy the asset back for this stated value. It is not uncommon for the bank client to be misled by the manufacturer in this situation, because the full value analysis has not been completed by the manufacturer and as a result, the bank client may be left short. Whether it is for a loan restructure, bankruptcy or insurance loss settlement, there are many concepts, methods and approaches taken by an appraiser in order to communicate their opinion of asset value. Clear communication regarding the purpose for the appraisal will generate a more meaningful report for its intended use and hopefully avoid confusion for all those involved in the report results.
1 Machinery and Equipment Textbook Committee of the American Society of Appraisers, Appraising Machinery and Equipment, Mc Graw Hill pp. 29, 79, 80, 81