In stronger economic times, when businesses were very profitable, the income approaches were quite popular. But in recent years, we have seen business values fall. Some analysts have told us that since September 11, 2001, the gross income of some businesses has dropped as much as 25%. The subsequent reduction in economic income has caused many cash flow minded lenders (and Appraisers) to begin worrying about income approaches to value. Many, as we have noted, are now returning to being “asset minded” in their thinking.

 Appraisers give themselves significant credibility and set themselves apart from competitors when they become Certified as Machinery and Equipment Appraisers (CMEA). “Highest and best use” is always an axiom of appraisal and sometimes highest and best use is to focus on the tangible assets of the company as opposed to goodwill (again, if there is little goodwill or perhaps no goodwill).

 Historically, Appraisers have found values for tangible assets in three ways:

• They’ve used the balance sheet values which are not the same as fair market value;
• They have relied on the owner’s statement as to value of the tangible assets; or
• They have relied on some non-certified person’s word such as a dealer or auctioneer who often has “another agenda.”

Therefore, real credibility comes to the Appraiser who can say, “I am also certified in tangible assets such as machinery and equipment.”

 Also certain approaches, which are standard in the business appraisal industry, require knowledge of the fair market value of the assets. For example, take the Excess Earnings Approach (sometimes referred to as the Investment Value Analysis). This approach requires that a return on investment be calculated on the value of the tangible assets, and that resulting numerical value must be subtracted from cash flow before capitalization of the income stream. Then the resulting capitalized value is added to the Fair Market Value of the tangible assets for the total value of the business. All of this is to say that if one does not start out knowing the true value of the tangible assets, he/she cannot perform this analysis correctly.

And what about those times when there is no goodwill? The assignment basically becomes an appraisal of the tangible assets. Many business appraisers are avoiding the embarrassment of being on a witness stand and having to admit that a substantial portion (if not all) of their value came from non-certified sources, and really turns out to be just a guess on their part.

 In summary, an Appraiser who is certified in valuing tangible assets enjoys the following:Additional credibility as a professional.

• Less liability when establishing values on companies that have numerous tangible assets.
• A decided advantage over a competitor’s business appraisals if the competitor is not certified in valuing machinery and equipment.
• Additional fee income through the selling of machinery/equipment appraisals. It should be noted that there are 10 machinery/ equipment appraisals ordered for every business appraisal, and machinery/equipment appraisals lead to business valuations. That is to say, clients call thinking they need a machinery/equipment appraisal but what they really need is a business appraisal.