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How to Value Equipment When Selling Your Business

When selling your business, it’s important to know the fair market value of your equipment. Just like you wouldn’t list your car for sale without knowing its worth, you shouldn’t put your business on the market without understanding the value of your assets. Valuing your business assets accurately ensures you receive a fair price for your company and helps you make informed decisions throughout the selling process.

In this article, we'll explore the importance of equipment valuations, the most commonly used valuation methods, and how to choose the right approach for your business.

Why Equipment Valuation Matters

Equipment valuation is necessary for several reasons.

Selling a business: To receive a fair price when selling your company, you need to know the value of your business equipment beforehand. The types of equipment a company owns impacts the value of a business.
Insurance purposes: Accurate valuation ensures your business equipment isn’t under-insured (insured for less than the assets are worth) or over-insured (insured for more than the assets are worth). Being under-insured can leave you financially exposed if you have insurance claims, while being over-insured is a needless waste of money.
Securing financing or determining replacement timing: Even if you have no intention of selling your business, valuing your company assets can help with financial reporting or when approaching lenders for financing. Also, an accurate valuation of business equipment can help you determine the optimal time to replace it.
Tax Considerations: Equipment valuations can help with calculating more accurate depreciation. Since depreciation expense affects the amount of tax a business pays, an asset valuation ensures your business doesn’t pay a dime more to the IRS than it should.

What Is an Equipment Appraisal?

An equipment appraisal is an in-depth analysis of equipment by a professional appraiser to establish the value of equipment or an acceptable value range.

A level of personal judgment comes into play when a piece of equipment is appraised. Because of this, the value one appraiser calculates may differ from the value another appraiser makes.

There are several ways to complete an equipment valuation. These include:

Market value appraisal: Determines the fair market value (FMV) of business equipment, which is the price the used equipment can fetch in the market, assuming the buyer and seller freely agree on a purchase price.
Liquidation value appraisal: This is where the appraiser determines the value of equipment assuming the sale is urgent, such as in bankruptcy.
Here, appraisers often use the orderly liquidation value (OLV), which is the amount expected to be realized from a liquidation sale, given a limited period and the seller is motivated to sell the equipment as-is.
Appraisers may also use the forced liquidation value (FLV) when equipment needs to sell quickly. This leads to steep discounts in value.
Replacement cost appraisal: Estimates the cost of replacing the equipment while considering factors like equipment age, condition, and functionality.

Three Methods for Valuing Equipment

There are three equipment valuation approaches and each of them often gives a unique value of an asset.

1. Sales Comparison Method

In the sales comparison method, an appraiser calculates the equipment value by researching the market data (including auction houses and trade publications) for similar equipment and evaluating its price point.

Using the recent sales price, the appraiser will adjust the equipment’s fair value to account for its age, condition, and remaining useful life.

2. Cost Method

With the cost method, an appraiser determines the equipment’s replacement cost, which is the cost of buying new equipment. Then the appraiser adjusts the replacement cost for wear and tear and age to arrive at the adjusted value of the equipment.

Appraisers prefer to use the cost approach if the equipment being valued doesn’t have an active market, making finding comparable sales data difficult.

Most times, this happens when the equipment is unique to the company or highly customized.

3. Income Method

In the income method, the appraiser determines the value of the particular equipment based on how much income the equipment produces.

Appraisers prefer to use the income approach if the asset in question is linked to a specific income stream.

Choosing the Right Equipment Valuation Method

When choosing the most suitable valuation methodology, appraisers consider several factors. These include:

Asset type
Purpose of the valuation
Market conditions
Availability and quality of market data

Equipment vs. FF&E: What’s the Difference?

While business equipment and FF&E (furniture, fixtures, and equipment) are often used interchangeably, there is an important distinction between the two. Business equipment refers to the tools and machinery directly used in the core operations of a company to produce goods or services. On the other hand, FF&E encompasses a broader category that includes business equipment along with all other items necessary for a business to function and support the work environment and customer experience.

Here are some examples to illustrate the difference between equipment and FF&E in various industries:

Restaurant Industry:

Equipment: Ovens, grills, refrigerators, and dishwashers used in food preparation and storage.
FF&E: Tables, chairs, menus, tableware, point-of-sale systems, and décor elements that create ambiance.

Construction Industry:

Equipment: Heavy machinery such as excavators, bulldozers, cranes, and power tools like drills, saws, and nail guns used in construction tasks.
FF&E: Office furniture, computers, safety gear, portable toilets, and signage necessary for the business to operate and ensure worker safety.

Medical Industry:

Equipment: Diagnostic machines (e.g., MRI scanners, X-ray machines), surgical tools, monitoring devices, laboratory equipment, and sterilization equipment used directly in patient care and medical procedures.
FF&E: Examination tables, hospital beds, waiting room furniture, computers, communication systems, refrigerators for medication storage, and décor elements that create a welcoming environment.

Auto Repair Industry:

Equipment: Lifts, jacks, diagnostic scanners, and specialized tools used for vehicle maintenance and repair.
FF&E: Workbenches, storage cabinets, office furniture, computers, customer waiting area furniture, and vending machines.

Equipment Valuation's Role in Determining an Asking Price

When valuing a business for sale, the value of the equipment plays a significant role in determining the overall asking price. The equipment owned by a business is a tangible asset that contributes to the company's total value, alongside other factors such as intellectual property, goodwill, and financial performance.

Here's how equipment valuation impacts the asking price:

1. Asset-based valuation: The fair market value of equipment is added to the value of other assets to determine the business's overall value.

2. Income-based valuation: The equipment's condition, efficiency, and remaining useful life can impact the business's ability to generate future cash flows, indirectly affecting the asking price.

3. Attractiveness to buyers: Well-maintained, up-to-date equipment can make a business more appealing to buyers, potentially increasing the asking price.

A thorough understanding of your equipment's fair market value allows you to justify your asking price, identify areas for improvement, and negotiate effectively with potential buyers.

If your equipment is financed, work with a broker to prepare for negotiation, due diligence, and structuring the sale—equipment financing can directly impact how your business is valued and how deals get done.

Hiring Professionals to Help with Valuation

Consider hiring professionals like accountants, appraisers, business brokers, and attorneys to help you value and sell your business. Their expertise can act as an insurance policy to ensure you've reviewed all risks and can potentially help you achieve a significantly higher selling price for your business.

When preparing to sell your small business, don't underestimate the value of your equipment. By understanding the importance of equipment valuation and working with professionals to determine the fair market value of your assets, you'll be well-positioned to maximize your returns and ensure a successful sale.

To learn more about how to value a business, visit BizBuySell’s Valuation Learning Center. Or, use the BizWorth calculator to get an estimate of the value of your business instantly.