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Plant And Equipment Valuation: Why Is It So Important?

Plant And Equipment Valuation: Why Is It So Important?

jeremiah grant
By - Jeremiah Grant
Last Updated - February 2nd, 2024 8:42 AM
Feb 02

Manufacturing industries have always been the backbone of the national economy. And rightly so, as this sector has built the country from the ground up. 

So don’t be surprised when I tell you that these industries are among the most sought-after businesses on the market. 

And as the number of these businesses is growing at a rate of 0.7 percent, there are a lot of entrepreneurs looking to buy or sell facilities. Not to mention, an equally large number of them simply want to expand their business and increase profitability. 

But notwithstanding which category of entrepreneurs you’re in, a plant and equipment valuation is something you shouldn’t miss. 

In fact, even if you’re not planning any new moves, as a business owner, you’ll definitely need a complete plant valuation for multiple reasons. 

So, why is a plant asset appraisal so important in the first place, and how do you use one for your business? 

Well, read on as I’ve discussed everything about plant and machinery evaluations along with my own insider tips. 

What is a plant and equipment valuation?

Before we discuss the importance of a plant evaluation, it is essential you understand what it exactly is. 

To begin with, a plant and equipment appraisal determines the fair market value of your manufacturing facility and all its machinery combined. Herein, a certified business appraiser will conduct a detailed assessment of the plant itself and the plant-owned equipment used for production and delivery purposes. 

For instance, let’s say you want to assess the value of a fabrication facility you own. In this case, a business appraisal expert like myself will determine the value of the facility, the fabrication machinery, as well as the vehicles used to deliver fabricated products. 

You see, not only do the plant and equipment account for a majority of your company’s assets, but they also determine expenses and revenue. As such, valuing these assets is essential for both operational purposes and determining the overall value of your business. 

Interestingly, a plant and equipment assessment isn’t just about the manufacturing industry, as it also includes the service sector. That’s because businesses offering services also often operate from a facility and possess various equipment and machinery for service delivery. 

Discover Your Plant and Equipment’s Value Now!

Understanding the value of your plant and equipment is essential for expansion, investment, or sale readiness. Our expertise is centered on valuations for plant and equipment, providing you tailored indusry insights. Tap the ‘Get A Quote’ button to obtain a free quote and a sample report.

Why is a plant and equipment valuation so important?

Now that you know what a plant and equipment assessment exactly is and what it covers, let’s see why it is so essential. 

A fair market value or FMV of your company’s fixed assets comes in handy more often than not. For instance, apart from a buy-sell deal, you’ll need an equipment assessment to take stock of your inventory, raise finances, mitigate risks, and more. 

In all, here are some scenarios that call for an accurate valuation of plant and equipment: 

  • Verification of total fixed assets and their value
  • Sale of existing machinery or purchase of new machinery 
  • Raising finances 
  • Risk mitigation 
  • Determining the remaining service life of plant and equipment 

Apart from these, you may also need a plant asset appraisal for various other purposes. So, let’s have a detailed look as to when and why you might need this appraisal. 

1. A plant valuation is an essential part of financial reporting 

Financial reporting is essential for all businesses, regardless of their size or scale. That’s because these reports give you a clear picture of your company’s overall financial position. 

Now, when it comes to the manufacturing industry, plant and equipment assessments are a critical factor in financial reporting. 

How, you might ask? 

Well, the property, machinery, and all other tools combined comprise the lion’s share of your company’s tangible assets. So, by knowing the fair market value of these physical assets, you can estimate what the total worth of your business could be. 

Also, a plant asset appraisal will assist the overall business valuation, upon which financial reports are based. 

Furthermore, a plant valuation is important for determining the carrying value of your company’s physical assets. And this, in turn, helps you calculate the precise amount of losses that you’ve incurred in the form of general impairment and depreciation. 

As a result, you can make informed strategic decisions involving investment in asset renewal or determining an offer price for asset sale, etc. 

2. An assessment helps verify total fixed assets and their value

Verifying the total number of fixed assets and their present-day market value is something that all businesses need to do. In fact, if you own a manufacturing company, you’ll need to do this more often than not. 

You see, an asset verification is an opportunity to account for all your facility’s assets. And a plant and equipment evaluation can precisely detail all your fixed assets and also provide a dollar value for each of the assets. 

This, in turn, will help you in three situations:

  • First, when making essential operational decisions regarding the purchase of new equipment, a verified asset list will help you do so accurately. 
  • Second, with all your assets and their value handy, you can decide which ones you need to sell or dispose of. For instance, if there’s an outdated or unused fabrication machine, you might decide to sell it off before its market value depreciates further. 
  • Third, and most important, this will help you make smart decisions regarding long-term investments in fixed assets. 

You might also want to read – Business Valuation Asset Based Approach

3. It helps determine the remaining service life of plant and equipment 

Determining the remaining lifespan of plant and equipment is an important aspect of operational planning and optimization in manufacturing industries. And to that end, an assessment of the plant and its fixed assets helps estimate how long you can use them. 

For instance, let’s say you’re the owner of a lathe workshop who wants to optimize your plant’s manufacturing, minimize resource waste, and increase profitability. 

Now, the fact that a plant and asset appraisal provides you with an estimated lifespan of these assets will help you figure out: 

  • Which equipment or areas of the plant require maintenance, and at what time. 
  • Which equipment or equipment parts need to be replaced entirely. 

This information is invaluable for optimizing your plant’s production capacity and quality. Also, it helps you calculate the total capital expenditure that you’ll need to undertake for the required maintenance and replacements. 

4. Plant asset appraisal assists in the purchase or sale of equipment 

Yet another aspect of operating a manufacturing facility is the purchase and sale of equipment. And depending on your plant size and production scale, this can even be a regular occurrence. 

For instance, you might have to buy new equipment or sell existing ones if: 

  • Plant equipment/s has reached the end of service life or lost efficiency and needs to be replaced. 
  • The fair value of plant equipment/s is depreciating, and you want to cash in before it depreciates anymore. 
  • Your business is incurring losses, and you want to raise capital by liquidating some of your plant’s fixed assets. 

But notwithstanding why you need to sell or purchase plant equipment, you’ll need a valuation of the fixed assets or plant equipment in this case. And that’s for two main reasons: 

  1. When selling your plant equipment, an independent valuation will ensure that you sell these assets at a fair price and don’t end up incurring losses. 
  2. When purchasing equipment, a fair market value of your existing inventory will help you determine the rate of depreciation. This will allow you to negotiate a favorable purchase deal with the seller. 

5. Plant and equipment valuation aids expansion plans 

Expansion and growth are the key objectives of all businesses, including manufacturing companies. And to do so, you’ll need to expand your existing facility, build new facilities, and procure new equipment, to name a few. 

Not to mention, your existing plant and equipment will also need optimization in order to support the overall growth. 

Also, it goes without saying that all of these steps call for careful planning and execution. 

But in order to achieve all of the above, a plant and equipment appraisal is a prerequisite. Here’s why: 

  • For growth and expansion planning, an assessment of your existing facility and fixed assets will help you make informed decisions. 
  • When building a new facility or acquiring assets, you can use an appraisal of the existing fixed assets as a roadmap. Also, the fair market value of fixed assets and total depreciation combined can give you an estimate of the required capital for expansion. 
  • When optimizing the existing plant and equipment, an appraisal will help you undertake essential upgrades. 

6. You’ll need a valuation for risk mitigation 

When it comes to manufacturing industries, no fixed asset is averse to risk. Worse, it can cost you big time if left ignored.

Thankfully, a plant and equipment valuation can help you mitigate these risks in time and help prevent losses.

You see, the fact that these valuations examine the condition of your assets up close provides a good chance to determine their existing condition. And apart from assigning a dollar value to the assets, this also offers an opportunity to locate potential risks. 

As such, you can take proactive measures to mitigate those risks in time. 

7. Asset appraisals are necessary when raising finances 

Be it expansion, diversification, or just to weather an existing crisis, you might have to raise finances for multiple reasons. And in order to receive the necessary finances quickly, you’ll likely be asked for a plant and equipment assessment report. 

Why? 

Well, lenders want to make sure that their investment is safe and that they can recover it if needed. So, a robust valuation of fixed assets provides a sense of surety to lenders. 

You might also want to read – 409A Valuation: A Complete Guide For Startups

Plant and equipment valuation: How is it done? 

Evaluating a plant and its equipment is different from a complete business valuation. That’s because the former only evaluates the fixed assets and is used for specific purposes. 

Nevertheless, the methods for valuing plant and equipment are similar to that of a complete valuation and include: 

  1. Cost approach 
  2. Market or sales comparison approach 
  3. Income approach

So, let’s have a look at what each of these approaches involves and how you can use them to assign a fair market value to your fixed assets.

A. Cost approach 

As the name suggests, the cost approach to plant asset appraisal calculates a fair market value of the fixed assets relative to their cost. 

The methodology used here is very straightforward and involves calculating the total amount that a buyer will pay for your business’s fixed assets. 

For instance, to calculate the total value of your business’s plant and equipment combined, I’ll first calculate the total cost to build that plant and procure brand-new equipment. Thereafter, I’ll estimate the total amount of depreciation for all the assets. 

Now, I’ll take the total value of fixed assets and subtract the total depreciation from it to derive a fair market value. 

B. Market approach 

The market approach is also called the sales comparison approach and is a widely used method for valuing manufacturing facilities. Herein, the value of your plant and equipment is derived by calculating the value of similar businesses. 

For instance, to estimate the value of your fixed assets, I’ll analyze the fixed asset value of similar-sized companies in the same industry that were sold in the last year. 

And to do so, I’ll look at publicly available data of businesses that resemble yours on platforms like BizComps

Discover Your Plant and Equipment’s Value Now!

Understanding the value of your plant and equipment is essential for expansion, investment, or sale readiness. Our expertise is centered on valuations for plant and equipment, providing you tailored indusry insights. Tap the ‘Get A Quote’ button to obtain a free quote and a sample report.

C. Income approach 

The income approach looks at the potential future earnings that your plant and equipment can generate in order to assign a dollar value to them. 

Now, I don’t suggest using this approach for fixed asset valuations, given the ambiguity regarding future earnings. However, if you’re using this approach, I suggest you use the following income calculation methods for higher accuracy: 

  1. Direct capitalization 
  2. Discounted cash flow 

You might also want to read – What Is A Qualified Appraisal For Estate Tax Purposes

Conclusion 

As you can see, a plant and equipment valuation comes in handy for more reasons than you’d have previously thought. For instance, apart from general financial reporting and asset verification, a valuation also helps you undertake essential maintenance and optimize plant output. 

So, it is essential to have an updated valuation report after a detailed assessment of these two most critical fixed assets. 

Wondering how you can evaluate your plant and all its equipment? 

You can get in touch with us. 

At Arrowfish Consulting, we’re a team of seasoned business appraisers with over two decades of experience in valuing manufacturing industries. So, from accurate valuation to value maximization tips and more, we’ve got your back. 

jeremiah grant

Jeremiah Grant

Jeremiah Grant is the Managing Partner of Arrowfish Consulting. In addition to acting as a primary liaison for many of the firm’s engagements, He primarily focuses on business valuation and economic damages expert witness assignments, in addition to forensic accounting and insurance claims analysis.