Business Development Bank of Canada clarifies used equipment valuation methods

The Business Development Bank of Canada (BDC) has published a comprehensive guide aimed at helping businesses determine the value of their used equipment. The resource underscores that valuing equipment can be complex, with the outcome depending on both the purpose of the valuation and the appraisal method employed.

BDC notes that many business owners have only a vague understanding of their equipment's worth. However, knowing the correct value is crucial for several reasons, such as during purchase and sale transactions, for ensuring adequate insurance coverage, or when using equipment as collateral for financing. The guide outlines several distinct types of values, including fair market value, replacement cost new, and liquidation values, which differ significantly from standard accounting book values.

Understanding the purpose of the valuation is presented as the initial step. BDC categorizes valuations into three main groups: equipment for sale or purchase, insurance purposes, and equipment for continued use in operations. For sales, fair market value or various liquidation values are commonly used, depending on the nature of the sale. Insurance purposes typically rely on actual cash value or the replacement cost of new, similar equipment.

For scenarios involving continued use where equipment is not intended for sale, valuations may relate to financial reporting or serve as collateral for financing. In such cases, fair market value is often the standard, although some lenders might accept valuations based on forced liquidation value as security. The guide also provides a glossary of appraisal terms, defining concepts like Orderly Liquidation Value (OLV) and Forced Liquidation Value (FLV).

To determine equipment value, BDC highlights three primary methods: the sales comparison approach, the cost approach, and the income approach. The sales comparison method involves researching market data on sales of similar equipment. The cost approach estimates the expense of acquiring new, equivalent equipment, adjusted for depreciation. The income approach bases value on the potential cash flow the equipment can generate. Businesses are encouraged to consult professional appraisers when necessary to ensure accurate valuations.