Orderly Liquidation Value is defined as “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”. This is the value definition published by the American Society of Appraisers in the text, Valuing Machinery & Equipment (2005).
Inherent in the definition is the disposal of all assets in an “as-is” condition with all expenses of removal and transportation incurred by the buyer. It is assumed that a professionally managed sale would be conducted by a qualified party familiar with the type of equipment and that sale proceedings would begin immediately upon the decision to cease operations. This is extremely important as allowing the subject items to sit idle and unattended for an extended period of time could have a significant negative impact on value.
OLV appraisals are typically utilized by secured lenders for the purpose of determining value for the subject assets which are to be pledged as collateral by a prospective borrower. In many cases, the lender may request the utilization of a definition of value that clearly establishes the time period to be considered for an orderly liquidation. In other cases, the lender may rely on the appraiser to determine the orderly liquidation time period. M&EAA recognizes that the orderly liquidation time period is not to be assigned arbitrarily, as this factor has a significant impact on concluded values.
It is important to further understand that OLV is a gross estimate of value. A net OLV appraisal requires the consideration and reporting of the expenses to be paid by the lender during the duration of the prospective sale. These expenses include but are not limited to: occupancy costs; continued utilities costs; retained employee salaries as well as continued benefits and stay on considerations; orderly sale management fees, etc.
Gross OLV appraisals are most commonly requested by lenders. Even if the appraiser has been specifically contracted to determine the gross OLV of the subject machinery & equipment, it is his or her responsibility to consider the expenses that would be inherent with a realized orderly liquidation sale. Sale related expenses are the primary determining factor in establishing the duration of an OLV sale (both gross and net).
As an appraisal rule of thumb, if the costs associated with a prospective orderly liquidation are determined to be “high”, the orderly sale period should be shorter. If the costs associated with a prospective orderly liquidation are determined to be “low”, the orderly sale period should be longer. A typical orderly sale duration can range from as short as two months to as long as six or even nine months, dependent on variables such as machinery & equipment type, number of locations, overall quantity, and standard versus custom considerations, etc.
In summary, it is the obligation of the appraiser to report the Orderly Liquidation Value (gross or net) that maximizes potential return for the client. It is erroneous for an appraiser to automatically assume a longer orderly liquidation sale period. Expenses are an inherent and unavoidable orderly sale factor, and should be carefully considered by the appraiser in the determination of the appropriate orderly sale time period.