Setting the proper price for disposition or liquidation of a piece of heavy equipment or machinery can be a daunting experience for even the most experienced equipment owners and finance professionals. Every estimate is a bet against an often-unpredictable market with its own timelines and seasonality. In pricing an asset for disposition, the heavy equipment industry has coalesced around the concept of an Orderly Liquidation Value (OLV). This is a metric without a market, yet it has become a fundamental element of nearly all major financing and leasing endeavors. As such, it is vital to understand this value and how it shapes the market.

Types of Valuations

There are three primary valuation metrics used in the heavy equipment world: Fair Market Value (FMV), Orderly Liquidation Value (OLV), and Forced Liquidation Value (FLV). According to the American Society of Appraisers, FMV can be considered as the value expected in any transaction with a single seller and a single buyer with no compulsion to buy or any time restriction. These values are most often encountered at a dealership in a retail/resale transaction or in a private party transaction.

At the other end of the valuation spectrum, FLV is the value of an asset with a single seller and multiple potential buyers, where the seller has a very short time window and is constrained by location. This is most commonly associated with auctions, although pure liquidation scenarios can also apply.

OLVs play the role of centrist amidst these two extremes. An OLV is similar in definition to an FLV, except that the seller is given an undefined, reasonable amount of time to find a buyer. This ambiguity provides a great deal of flexibility in the position of an OLV relative to FMV or FLV. It also creates substantial mystery in how OLVs are determined, since there’s no heavy equipment disposition channel which truly reflects orderly liquidations. However, there are a few key concepts that are always true:

• OLV is always less than FMV, since it still represents a liquidation scenario in which the seller is under compulsion to sell.

• OLV is always greater than FLV, since a skilled salesperson (or broker) will be able to secure higher-value buyers within the reasonable amount of time.

Major Risks with OLVs

Using any valuation metric can come with some risk, but relying primarily on OLV to represent a transaction during leasing can be especially tricky. If an asset’s OLV is set too low, there is a risk that the transaction will degrade to the level of an FLV, which will recoup less of the asset’s value and cause revenue loss. If an asset’s OLV is set too high, potential buyers may be dissuaded by the asking price and bid down to the true OLV. This will have a detrimental impact on forecasting and force naturally risk-averse lenders to tolerate greater risk on deals. Alternatively, profitable buyers may be so dissuaded by a high OLV that they dissipate, forcing the asset’s disposition down to FLV through disposing at the next heavy equipment auction. In fact, even if an asset’s OLV is set perfectly, there is still a cost. Disposing of heavy equipment at OLV requires a much higher degree of market participation: appraisers may provide a second opinion, marketing is required, negotiations may be needed with potential buyers, and there may be a cost for securing brokers to complete the deal. That time and effort cost may reduce the profitability of the deal, even if values are completely accurate.

Major Benefits of OLV

With so many potential pitfalls, it seems that using an ambiguous valuation metric like an OLV would be a risky idea. However, OLVs do bring some benefit to leasing deals. For starters, it’s an appraisal standard, which lends to its broad acceptance by the financial community. All things considered, OLV’s are generally a safe and hedged bet in a strong equipment market. Its inherent flexibility also provides benefit to experienced finance professionals and equipment sellers who know their markets. This allows the determination of an OLV to become a competitive advantage over other firms. For example, some assets sold at a large equipment auction could carry an OLV if the equipment owners were given sufficient time and were successful in securing high-value bidders for their equipment.

Making Your Own Call

Equipment finance decisions regarding heavy equipment are fraught with ambiguity; introducing additional opacity through an overreliance on OLVs can complicate business even further. Yet OLVs can provide a competitive advantage alongside financial benefit if used properly. Good Orderly Liquidation Values should always be bound by confident FMVs and FLVs, verified with market comps and adjusted for key market factors like usage and location. By anticipating and controlling for the inherent ambiguity of an Orderly Liquidation Value, firms providing equipment financing can better equip themselves and their customers for growth.