By: Andrea Wasserman, AccuVal Associates, Inc.
When there is no demand for machinery the owner of the equipment and/or their debtors are forced to consider a few options and decide upon the one that is the "least worst." These options generally include: 1) Hold for future sale; 2) Cannibalize to recover the value of component parts; 3) Scrap to recover metals value; and/or 4) Write a check to have someone haul it away.
Hold for Future Sale – There are times when markets deteriorate so rapidly and unexpectedly that machinery that would otherwise have substantial value cannot be sold at any price. In these cases, it is generally most prudent to mothball the machinery until demand returns. But sometimes recovery takes years; meanwhile, the machinery must be stored and maintained or it will deteriorate beyond repair. The "Hold for Future Sale" strategy is not a strategy for the faint of heart because unknowns are numerous and holding costs are high.
Cannibalize to Recover the Value of Component Parts – Sometimes the value of the parts exceeds the value of the whole. But be careful about adopting this exit strategy because when demand for the machinery drops, there can be a corresponding drop in the demand for repair and replacement parts.
Scrap to Recover Metals Value – It seems reasonable to assume that you ought to be able to find someone willing to pay you what a machine is worth in weight. But don't forget, a scrap dealer has to see enough value in the machine to be willing to incur costs like dismantlement, cutting and sorting the scrap, plus transporting it to a mill or foundry to be remelted. Placing a large bet on the value of the scrap content is generally not your best wager.
Write a Check to Have Someone Haul It Away – When all else fails and there is no market for certain machinery, and there is no other way to capture residual value of any kind, then the machinery becomes a liability to the seller. Disposing of machinery can be time consuming and expensive, incurring other expenses like the proper disposal of lubricants and other hazardous materials that can increase disposal costs exponentially. When appraisers tell you something has "no value," a reasonable follow-up question is: "Yes, but does the machinery have negative value?" Expect this kind of written commentary in appraisal reports.
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