Business owners and financial managers of Canadian firms often with to replace older equipment with newer technology, and that can be of course anything from shop floor equipment to computers.
So what does the business owner do with equipment that he currently owns that was on a lease that has come to end of term? That equipment needs to be disposed of in an efficient and economic matter.
As a business owner you want to dispose of the equipment in a method that gives you the highest price while at the same time minimizing your expenses around that entire process. Back at the leasing company this entire process has an industry term, generally known as 'remarketing'.
In order to begin the process you need to look at a couple 'big picture' scenarios - namely what do you currently believe the equipment is worth, and is there any sort of demand out in the market place for the equipment. If there is some solid sense that the situation can be advantageous in value to your firm (we wouldn't recommend remarketing 1990 DOS based PC's..!) you need to asses what sort of costs will be involved and who in your firm will be primarily responsible for the divestiture.
So what's one of those 'bottom lines'? It is of course, what is the asset worth, and how do I determine that. Many industry publications for the asset type might provide you with a 'black book' residual value on the equipment - that is similar to the 'black book' we hear about at a car dealer's lot. Clearly this sort of number is only a guideline, as a lot of factors now come into play, like technology obsolescence (think computers!) as well as maintenance if in fact maintenance was applicable.
When you are looking at a disposition number that is reasonable you are in fact looking at three different numbers. Let's clarify that comment. You are looking for a number that matches the three industry terms -
Confused?? It's not that bad really. FMV stands for fair market value, and is a broad term which simply says that is it the price that a reasonable buyer will pay with no time constraints and some good market activity. It's quite comparable to selling your house and determining with the realtor what the current market will bear.
OLV is Orderly Liquidation value, and is essentially the auction process that might be held by you, an appraiser, or an auctioneer. The asset is put up for sale, and given current market conditions, is sold at highest bid.
FLV is forced liquidation value, and that is, from your perspective, kind of the ugly number - the asset has to be sold, it has to be sold tomorrow, who will give me what for it immediately, etc!
So the bottom line is we like FMV, we don't like FLV as the current asset owners.
Again, using our house analogy as an example you need to do some research into recent sales, that is of course because it gives you a 'comparable'. Your market research should come from both vendors and manufacturers and resellers of that type of asset.
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