Charlie Mitchell, President, Mitchell Automotive Services
While working with clients on Asset Purchase Agreements (APA), many questions about Fair Market Value, the most common type of appraisal method used, generally arise. Here are some guidelines to assist in the navigation of the various terms and conditions on writing agreements and determining an accurate Fair Market Value.
First, remember that when writing an Asset Purchase Agreement (APA), it is critical to be very specific on verbiage used for furniture, fixtures, and equipment to remove any uncertainty on how these items are going to be appraised. Regarding the appraisal, there are many interpretations of the most common type, called Fair Market Value.
Charlie Mitchell, President, Mitchell Automotive Services
If the buyer and seller have different interpretations of Fair Market Value and the APA was not specific as to the definition used, a second appraisal may be required. Ensuring these items are agreed upon at the start will result in savings in time and money. For example, our company recently had to perform a second asset assessment because the buyer and the seller did not understand the verbiage used to define Fair Market Value.
In another acquisition, the franchises were scheduled to move to a new location six months after the transaction was closed. The APA verbiage stated simply Fair Market Value. The seller interpreted that as Fair Market Value in Continuous Use. However, the buyer thought the appraisal was done to determine Fair Market Value – Removal. In this case, we were able to assist in establishing a mutual understanding of how the appraisal values would be determined so the transaction could be successfully completed.
To help you understand the various terms used in this process, below are the definitions a Certified Machinery and Equipment Appraiser would follow.
Machinery and Equipment Definitions
The following values are defined in the publication Valuing Machinery and Equipment: The Fundamentals of Appraising Machinery & Technical Assets, Third Edition, by the American Society of Appraisers.
1.
Fair Market Value is an opinion expressed in terms of money, at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having a reasonable knowledge of relevant facts, as of a specific date.
2.
Fair Market Value – Removed is an opinion, expressed in terms of money, at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts, considering removal of the property to another location, as of a specific date.
3.
Fair Market Value in Continued Use is an opinion, expressed in terms of money, at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts, as of a specific date and assuming the business earnings support the value reported, without verification.
4.
Fair Market Value – Installed is an opinion, expressed in terms of money, at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts, considering market conditions for the asset being valued, independent of earnings generated by the business in which the property is or will be installed, as of a specific date.
5.
Orderly Liquidation Value is an opinion of the gross amount, expressed in terms of money, that typically could be realized from a liquidation sale, given a reasonable period of time to find a purchaser (or purchasers), with the seller being compelled to sell on an as-is, where-is basis, as of a specific date.
6.
Forced Liquidation Value is an opinion of the gross amount, expressed in terms of money, that typically could be realized from a properly advertised and conducted public auction, with the seller being compelled to sell with a sense of immediacy on an as-is, where-is basis as of a specific date.
7.
Liquidation Value in Place is an opinion of the gross amount, expressed in terms of money, that typically could be realized from a properly advertised transaction, with the seller being compelled to sell, as of a specific date, for a failed, non-operating facility, assuming that the entire facility is sold intact.
8.
Salvage Value is an opinion of the amount, expressed in terms of money, that may be expected for the whole property or a component of the whole property that is retired from service for possible use, as of a specific date.
9.
Scrap Value is an opinion of the amount, expressed in terms of money, that could be realized for the property if it were sold for its material content, not for a productive use, as of a specific date.
10.
Insurance Cost New is the replacement or reproduction cost new as defined in the insurance policy less the cost new of the items specifically excluded in the policy, as of a specific date.
11.
Insurable Value Depreciated is the insurance replacement or reproduction cost new less accrued depreciation considered for insurance purposes, as defined in the insurance policy or other agreements, as of a specific date.
It has been said that “Time is Money”. When facing the process of writing or interpreting APA’s and Fair Market Value appraisals, use these tips to help you manage costs and maximize your return from any related transactions.
Mitchell Automotive Services consults with dealerships on fixed operations, including team training and development, inventory management, and process manual development.
Charlie Mitchell, MCMEA, is president of Mitchell Automotive Services. He can be reached at charlie@mitchellautomotiveservices.com or 1-602-527-6261. www.mitchellautomotiveservices.com www.managebywinning.com
