As a business owner, keeping track of your physical assets is an important step to ensuring things run smoothly. Equipment age, maintenance, and life cycle are metrics that help your decision-making process, especially when it’s time to replace or upgrade your used equipment. Determining fair market value (FMV) can be challenging, but it is a strategic step to making good financial decisions.
If you’re considering financing to replace or upgrade your equipment, there are some options to choose from, like a fair market value lease or a $1 buyout lease. To compare the different options, you need to know how to determine fair market value so you can assess which is most cost-effective for your business.
Key Factors Used to Determine Fair Market Value
One of the biggest challenges in valuing equipment is that there isn’t a one-size-fits-all approach. Varying quality between manufacturers and varying levels of use mean that sometimes it is not fair to compare two pieces of equipment that are meant to do the exact same job. Because of these differences, you need to look at a handful of key factors to help you analyze the value of equipment, which can then inform your future financing options:
- Life Expectancy: This is one of the most important factors. The quality of the equipment can have a huge impact on life expectancy. Equipment longevity may be measured in years, engine hours, mileage, machine cycles, etc. Knowing how much life is left in your equipment is a big indication of value.
- Age: Even if your equipment has been lightly used, being past its prime might signal additional failure modes as materials like plastics may decay. Age can also be a liability for older designs, since advances in technology often mean more speed and more automation.
- Condition: Given two pieces of equipment that are otherwise the same, would you buy the one that has been exposed to the elements and abused with percussive maintenance (like a hammer), or would you prefer the one stored inside and meticulously maintained? There can be a huge variation in condition based on where the equipment is used and whether it was properly maintained.
- Availability: Basic supply and demand affects the prices of equipment. Availability of parts for repairs is also important to factor in.
- Obsolescence: If the manufacturer has gone out of business or no longer supports the model you are valuing, this can be quite detrimental to the FMV.
In addition to all these factors, the type of equipment used by your business can vary widely as well. For example, office furniture and construction equipment have very different markets, but both may have a place in your business. Their life cycles and FMV calculations are going to be different, which is something that needs to be taken into account when making financing decisions.
Valuation Approaches for Determining Fair Market Value
Assessing the key metrics about your equipment is only the first step in determining FMV. If you are determining fair market value for the purpose of buying or selling equipment, or if you are calculating depreciation for tax purposes, you may take a different valuation approach.
This approach is based on actual prices of similar equipment, while adjusting for the factors listed above. By doing market research and comparing the prices that similar new or used equipment has sold for, you can get an idea of the final price your equipment could fetch. Equipment with a more active market will give you the best estimate. If you don’t have much to compare to, it will be harder to make an accurate assessment.
If there isn’t an active market for the type of equipment you are valuing, then the cost approach is a useful method. This is based on the replacement cost for your particular equipment, and then that number is adjusted for the remaining life expectancy, age, and condition.
This valuation method uses the income produced by that specific piece of equipment to determine value. It can be difficult to attribute income to individual pieces of equipment, so the income approach is rarely used in this context. More often, this valuation approach is used to determine the value of a business as a whole entity.
No matter which valuation method you use, purchasing equipment for your business is an expensive endeavor. When it comes time to upgrade your equipment, or if you need to purchase more equipment to keep up with growing demand, buying outright can put a huge strain on your cash flow. Financing with a fair market value lease gives you an easy way to manage your cash flow while maximizing the life cycle of the equipment you need.
Team Financial Group Has Experience Determining Fair Market Value
Team Financial Group offers many options for financing the equipment you need to sustain your business. Our experts can help you determine what kind of financing will work best for your specific needs, and we have experience with determining fair market value for new and used equipment.
The content provided here is for informational purposes only. For personalized financial advice, please contact our commercial financing experts.