The changing world of appraisals: globalization has had a major impact on appraisals, and so has the internet and the growing use of intellectual property as collateral. Borrowers need to be aware of these changes.
Accurate appraisals are the very foundation of asset-based loans An asset-based loan is a loan, often for a short term, secured by a company's assets. Real estate, A/R, inventory, and equipment are typical assets used to back the loan. The loan may be backed by a single category of assets or some combination of assets, for instance, a . Companies count on them to ensure that their borrowing power is maximized, while lenders rely on them to support the value of the credit they are extending. But since asset values and the forces that affect them fluctuate, approaches to valuation and asset disposition also must evolve to meet them.
Over the past several years, driven by the economy and increased globalization globalization
Process by which the experience of everyday life, marked by the diffusion of commodities and ideas, is becoming standardized around the world. Factors that have contributed to globalization include increasingly sophisticated communications and transportation , the appraisal industry has changed significantly. How assets are sold and who is buying them are two of the most significant changes. The Internet and the growing use of intellectual property as collateral have also had an impact on deal structures and asset disposition recoveries. Lenders and borrowers need to be aware of these changes, which have substantially influenced the appraised value An appraised value (USA) or mortgage valuation (Australia) pertains to the assessed value of real property in the opinion of a qualified appraiser or valuer. It is usually used as a pre-qualification & risk-based pricing factor related to the issuance of mortgage loans by a of inventory, equipment and other assets other assets
Assets of relatively small value. For financial reporting purposes, firms frequently combine small assets into a single category rather than listing each item separately. used to secure debt.
Inventory Sell-through Brings Greater Recovery
Advance rates for asset-based lending Asset-Based Lending
A business loan secured by collateral (assets). The loan, or line of credit, is secured by inventory, accounts receivable and/or other balance-sheet assets.
Also known as "commercial finance" or "asset-based financing". deals historically were based on the forced liquidation Forced Liquidation
An action taken by brokerage houses that offsets and closes all positions within delinquent customer accounts in order to reduce exposure.
Notes: value of the borrower's inventory--how much the inventory would bring if it were sold in bulk to wholesalers, competitors or liquidators. Today, advance rates are typically based on a percentage of the net orderly liquidation value Liquidation value
Net amount that could be realized by selling the assets of a firm after paying the debt. (NOLV).
NOLV represents the gross orderly liquidation value recovery, less any expenses associated with the disposition. Rather than liquidating as much of the inventory as possible in bulk--at perhaps 40 to 50 percent of cost--most inventory appraisal companies attempt to sell some portion of the goods to the borrower's regular customers over a period of time.
This "sell-through" method typically produces a much higher gross recovery than a bulk sale, since a portion of the finished goods are sold at a higher percentage of cost and, in some cases, at a profit margin.
Expenses are much higher in a sell-through model versus a bulk sale, because of the costs associated with running the sale for a longer period. However, since finished goods are worth more to the borrower's normal customers, an inventory sell-through drives a much higher NOLV even after deducting the higher expenses. As a result, the sell-through approach has dramatically changed the way inventory is ultimately valued.
Used Equipment Market Challenged
With the sizable siz·a·ble also size·a·ble
Of considerable size; fairly large.
siza·ble·ness n. migration of manufacturing facilities to less expensive foreign locations, a higher percentage of used manufacturing equipment is being marketed outside the U.S. In the U.S., buyers for late-model equipment still can be found, but often, only foreign buyers are interested in older equipment.
One industry hit particularly hard by this trend is textiles. Within the past five years, hundreds of U.S. manufacturing facilities shut down as the apparel industry relocated to Mexico, Pakistan, India, China, Bangladesh and Sri Lanka Sri Lanka (srē läng`kə) [Sinhalese,=resplendent land], formerly Ceylon, ancient Taprobane, officially Democratic Socialist Republic of Sri Lanka, island republic (2005 est. pop. . Carpeting is one of the few categories within textiles where manufacturing remains primarily in the U.S., because shipping costs make it hard for foreign manufacturers to compete. For most other textile machinery, the U.S. market has softened soft·en
v. soft·ened, soft·en·ing, soft·ens
1. To make soft or softer.
2. To undermine or reduce the strength, morale, or resistance of.
3. considerably. Textile dealers are spending a substantial amount of time cultivating relationships with foreign buyers and brokers.
China also has been a major force in the overseas movement. It drove steel prices through the roof by buying scrap metal in any form from around the world, melting it, reusing it and ultimately selling many finished goods back to the U.S. China's legal and financial systems also have evolved, and the country has succeeded in attracting more venture capital, leading to state-of-the-art manufacturing facilities and technological advances.
The shift to overseas equipment sales has required appraisers and dealers to broaden their connections within other countries and expand their knowledge of government regulations and tax laws. In order to accurately value machinery and equipment, appraisers must have experience dealing with several different countries, and have a strong relationship with the equipment dealers most familiar with supply and demand issues in those countries.
The international equipment market's growth is a bit of a Catch-22. If the Third World manufacturing economy didn't exist, the U.S. market for both goods and equipment would be stronger. Worldwide competition for goods doesn't help U.S. producers, but it does create a place to sell equipment.
Impact of the Electronic Marketplace
The Internet has played a significant role in the expansion of overseas equipment sales. Because of its global reach and ease of use, it connects sellers with interested buyers much more quickly than traditional approaches, and is especially valuable in the disposition of specialized equipment.
Increasingly, the Web is being used as a vehicle for both advertising and conducting live auctions. By reaching a wider audience of potential buyers, some would argue that webcast auctions have narrowed the gap between the auction value and the orderly liquidation value. Most major liquidation The collection of assets belonging to a debtor to be applied to the discharge of his or her outstanding debts.
A type of proceeding pursuant to federal Bankruptcy companies send regular emails that identify equipment for sale and announce public auctions.
This additional exposure to the marketplace almost certainly has increased recoveries for used equipment sales. For inventory, the Internet has given appraisers the ability to analyze and sort data to identify which SKUs (stock-keeping units (database) stock-keeping unit - (SKU) /skyoo/ (rarely seen expanded) A common term for a unique numeric identifier, typically in a database. Originally this was used only for products, but has spread in usage.
Compare with UID for sense development. ) are moving slowly or are obsolete, improving the speed and accuracy of valuations.
Growing Use of Intellectual Property
While asset-based lenders historically have relied on tangible assets Tangible Asset
An asset that has a physical form such as machinery, buildings and land.
This is the opposite of an intangible asset such as a patent or trademark. Whether an asset is tangible or intangible isn't inherently good or bad. , there has been a growing interest in using intangibles or intellectual property such as brand names, trademarks and patents as collateral. Given the current availability of credit and in this borrower's market, asset-based lenders may include a larger percentage of intangible assets Intangible Asset
An asset that is not physical in nature.
Examples are things like copyrights, patents, intellectual property, and goodwill. These are the opposite of tangible assets. in the collateral pool. This doesn't necessarily increase the lender's risk exposure if the value of the intangible is carefully appraised.
Approaches for appraising intangibles typically are based on some form of discounted cash flow. For example, to value a trade name, the most common approach is the relief-from-royalty method. It considers how much revenue a company could generate by licensing a trade name that it owns. Licensed trade licensed trade n → comercio or negocio autorizado
licensed trade n → commercio di bevande alcoliche con licenza speciale names that generate royalty streams can be valued very accurately. For brands that aren't currently licensed, comparable licensing agreements can be used to estimate the royalty rate a given brand should command in the current market.
Intellectual properties, such as brand names, can have a significant impact on recoveries in the event of liquidation. Although intangible valuations need to be reviewed carefully when being eyed as collateral support, tangible fixed assets fixed assets npl → activo sg fijo
fixed assets npl → immobilisations fpl
fixed assets fix npl → may actually be harder to sell. For established brand names, real value can be justified because revenue can be generated through licensing agreements.
Getting It Right
Asset valuation, whether tangible or intangible, is a highly complex process that's part art, part science. Developing an accurate valuation requires tapping into the expertise and knowledge of appraisers with experience in a specific asset class, as well as a particular industry. A lender looking to underwrite To insure; to sell an issue of stocks and bonds or to guarantee the purchase of unsold stocks and bonds after a public issue.
The word underwrite has two meanings. an aluminum die-caster, for instance, may need the opinions of both the die-casting machinery expert and someone who is well versed Versed® Midazolam Pharmacology A preoperative sedative in aluminum inventory.
As globalization and changing economies continue to affect the marketability of collateral, it's critical that changes are factored into the process of determining its ultimate value.
Robert Maroney is Senior Vice President and Chief Appraisal Officer with Bank of America
Bank of America (NYSE: BAC TYO: 8648 ) is the largest commercial bank in the United States in terms of deposits, and the largest company of its kind in the world. Business Capital. He can be reached at 781.944.4226 or email@example.com.