Is my business worth more than its equipment?
A business that earns a healthy return is worth more than its equipment: a buyer pays for the earnings, the customers, the people and the contracts on top of the machines. A business that earns too little to support its assets is worth about what the equipment would bring, and its equity can be worth less once debt is paid. An equipment appraisal values the machines as personal property under USPAP Standards 7 and 8. A business valuation values the whole operation as a going concern, and uses the equipment value as one of its inputs.
Lukes & Lukes appraises the machinery and equipment side. Every report is USPAP-compliant and prepared by a NEBB-certified Machinery & Equipment Appraiser (CMEA).
By Jared Lukes · CEO & lead appraiser
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What is the difference between a business valuation and an equipment appraisal?
They value different things, under different standards, for different readers.
| Question | Equipment appraisal | Business valuation |
|---|---|---|
| What it values | Each machine, vehicle and piece of equipment the business owns | The business, or an ownership interest in it |
| Premise | Fair market value, fair market value in continued use, orderly or forced liquidation value | Fair market value of the business as a going concern, or on liquidation when that is worth more |
| Approaches | Sales comparison and cost; income rarely, for a single asset | Income, market and asset approaches |
| Standard | USPAP Standards 7 and 8 (personal property) | USPAP Standards 9 and 10, or the AICPA valuation standard (VS Section 100) for CPA members |
| Prepared by | A machinery and equipment appraiser | A business appraiser or a CPA who performs valuations |
| Result | A schedule with a value for every unit | One value for the business or the interest |
An equipment appraiser does not value goodwill, customer lists, backlog, receivables or the business as a whole. A business appraiser does not inspect a press brake and research what that model sold for at auction last quarter. On most transactions both are at work, each on its own piece.
Which one do I need?
The purpose decides it.
| Situation | Equipment appraisal | Business valuation |
|---|---|---|
| Bank loan secured by the equipment | Yes, usually orderly liquidation value | No |
| SBA loan to buy a business | Yes, for the collateral file | Often required on a change of ownership |
| Selling the company as an operating business | Yes, for the allocation and the buyer's lender | Yes, to support the price |
| Selling the equipment or closing the business | Yes, at a liquidation premise | No |
| Partner buyout | When the agreement or the asset approach turns on equipment value | Yes, for the interest |
| Estate or gift of company shares | When the asset approach is used | Yes |
| Estate holding equipment directly | Yes, fair market value at the date of death | No |
| Insurance | Yes, replacement cost | No |
On an SBA business purchase, SOP 50 10 requires an independent business valuation on a change of ownership when the amount financed, less the appraised value of the real property and equipment, passes a threshold set in the SOP, or when buyer and seller have a close relationship. The equipment appraisal enters that calculation directly. The equipment securing the loan is then valued for the collateral file; our 7(a) article covers what that file needs.
How does the equipment value feed a business valuation?
- The asset approach. The adjusted net asset method replaces the depreciated book value of fixed assets with their appraised value. For an asset-heavy business, the equipment can be most of the result.
- The income approach. The appraisal tests whether earnings support the asset base, and shows what replacement spending a buyer faces on an aging fleet or plant.
- After the deal. In an asset acquisition, buyer and seller report the allocation of the price on IRS Form 8594. Equipment falls in Class V; goodwill and going concern value fall in Class VII. Our purchase price allocation article covers the equipment line.
A fixed-asset figure inside a business valuation is not an equipment appraisal. A lender's collateral file asks for a separate, itemized report.
When is a business worth less than its equipment?
When the business earns less than a fair return on what its assets would bring. Common causes are a declining market, one customer carrying the revenue, an owner the business cannot run without, or a plant sized for volume that is gone. A buyer then prices the iron, not the earnings.
The equipment appraisal registers the same fact. Fair market value in continued use assumes the business earns enough to support the installed equipment. Where it does not, the appraiser measures economic obsolescence, and liquidation value becomes the relevant measure. Debt is the last step: equity is what remains after the loans, so a company can owe more than its equipment would bring.
What should an owner do first?
Name the purpose: a sale, a loan, a partner leaving, an estate, a divorce. That sets which valuation is needed and at what premise. Pull together the equipment list with serial numbers and the last three to five years of financial statements. When both reports are needed, use the same effective date and the same asset list for each. Our page for business owners covers what we need to start.
Owners in specific trades have more detail in what a construction equipment business is worth and what a machine shop is worth.
Common questions
Answers, up front.
Is my business worth more than the equipment it owns?
If it earns more than a fair return on what the equipment would bring, yes; the excess is goodwill and other intangible value. If earnings do not support the assets, the business is worth about what the equipment would bring, less debt and the cost of selling. A business valuation measures the first; an equipment appraisal measures the second.
I am selling the company, not just the machines. Which valuation will the buyer's bank want?
Usually both. The bank reads a business valuation to support the price and an equipment appraisal for the collateral file, at orderly liquidation value. On an SBA loan, SOP 50 10 sets when the business valuation is required on a change of ownership.
Can an equipment appraiser value my whole business?
No. A machinery and equipment appraiser values tangible personal property under USPAP Standards 7 and 8. Valuing a business or an ownership interest is business appraisal, governed by USPAP Standards 9 and 10 and, for CPA members of the AICPA, by its valuation services standard. We work alongside the business appraiser or CPA and supply the equipment value.
How does an equipment appraisal change a business valuation?
In the asset approach, the appraised value replaces the depreciated book value of the equipment on the balance sheet. In the income approach, it tests whether earnings support the asset base and what replacement spending a buyer faces. After an asset sale, it supports the equipment allocation reported on IRS Form 8594.
Why did my business valuation come in lower than my equipment appraisal?
The two answer different questions. A going-concern valuation can come in below the equipment's fair market value in continued use when earnings do not support that installed value, and the business appraiser then weighs whether the owners would receive more by selling the assets. Debt deducted to reach equity value lowers it further.
Does the SBA want a business valuation or an equipment appraisal when I buy a business?
Often both. SBA SOP 50 10 requires an independent business valuation on many changes of ownership, keyed to the amount financed less the appraised value of real property and equipment, and to whether buyer and seller have a close relationship. The equipment securing the loan is valued separately for the collateral file.
Should I hire the business appraiser or the equipment appraiser first?
When the asset approach matters to the business valuation, order the equipment appraisal first; the business appraiser uses it as an input. Give both the same effective date and the same asset list.