Defining Equipment Value

Running the Business

If you ask me to give you a number for equipment value... well, I guess I would need more information before I can offer an answer. As a CPA and financial analyst who also works in the M&A (mergers and acquisitions) market, my brain generates a menu of values (see Equipment Value Categories), depending on what a contractor is trying to establish.

When I have a typical discussion with clients needing a business valuation, I ask them "as of when" and "what for" because the spread in values can be pretty significant. We won't get into why there is a spread, but believe me there is one.

Think there can be a significant spread in equipment values? Actually, you can count on it. If you add in seasonality and the business cycle, the values get even nuttier. In short, the value of anything for any circumstance is good for about 20 seconds, and the answers will be different from each source you ask to supply equipment values.

Equipment transactions
The equipment value categories listed below can be grouped according to similar themes. For example, with equipment transactions, you would be concerned with retail, trade-in, wholesale and rent-to-sell transition value, and possibly (but hopefully not) scrap value.

In the first category, you can find rental and wholesale information from manufacturer and dealer web sites. Rental houses may also be able to provide a price on a new or used piece of equipment. Auction houses and Internet equipment sites help establish a price range for used equipment.

Trade-in values may be less or more than wholesale, depending on the market conditions the manufacturer and dealer are experiencing. Right now, for example, equipment prices may be soft depending on where you work, or because your work is concentrated in the housing industry. On the other hand, certain segments of the market are still running at a good pace.

Book/tax values
When talking to your banker and accountants, you would be more concerned with book value, tax basis, AMT (alternative minimum tax) basis, fair value and loan value. To complete the allocation, you have "going concern value", regarding ownership transition or business dissolution; or rental value, where you take into account long-term rental revenue that adds to the value of equipment. I guess we can also throw in loan value here because, for many of you, it is a very important aspect of your business.

A smart way to depreciate equipment for book purposes is to "write it down" so when you "normally" sell it, you will get at least the book value from the sale or trade. That way, you don't experience any surprises when you do sell the unit.

I don't think you want to overstate depreciation and show a low book profit, then reflect a big gain when you sell, or vice versa. Banks don't like surprises. And since your tax income or loss depends on tax depreciation methods, there is little benefit in trying to reflect a low book profit.

Keep the book/tax difference in mind. Your accountant should share with you the differences, as well as your exposure to AMT. AMT is the one surprise a lot of business owners are feeling for the first time. Make sure your accountant reviews this exposure before year end, because steps you would normally take to eliminate ordinary tax may not work in an AMT situation.

In addition, make sure you understand your insurance policies and how they work if you incur a loss. Make sure you're clear on the co-insurance provisions when determining the value of the assets being covered. In some cases, the co-insurance may not apply. If not, make sure you see it in writing. And don't forget, banks expect to be covered for their loan value should the equipment be lost in some way. Believe me, it's better to have the insurance company pay than you.

Know where you stand
Examine your fixed asset list of equipment to see where you stand on wholesale or auction value, book value, loan value and tax basis. Having this schedule available gives you the ability to make quick decisions when you have to decide what to sell and what to buy. Generating big tax gains, or not collecting enough in proceeds to repay the bank loan, can make for a bad day.

So the next time someone asks you the value of your equipment, you can counter with: "As of when and for what purpose?" You should have a pretty good idea of the answer, if you are hoping to account for your business with reasonable expense levels attributable to your equipment investment. ?

Equipment Value Categories
The following will give you a rough idea of what "equipment value" can mean. I'm sure you can add a few more categories of your own. If you think of anything good, let me know.

  • Retail value
  • Trade-in value
  • Wholesale value
  • Book value
  • Loan value
  • Tax basis
  • AMT basis
  • Fair value
  • Insurance value
  • Scrap value
  • Rent-to-sell
  • Rental value transition value
  • Going concern value
Latest