What is the difference between fair market value and orderly liquidation value for equipment?

Both terms describe a sale price, but the sale they imagine differs. An accredited equipment appraiser quoted by BDC says equipment can legitimately have at least half a dozen types of value, all market-based and separate from the book values on financial statements. This page sets out two of them and a third, forced liquidation, using BDC and CBV Institute. It gives no amounts and no ratio between them.

The definitions

BDC defines fair market value of equipment as the estimated amount the asset would sell for in the market. It defines orderly liquidation value as the estimated gross amount the equipment could sell for in a liquidation sale given reasonable time to find a buyer, and forced liquidation value as the estimated gross amount it could sell for at an auction held immediately. CBV Institute’s glossary says orderly liquidation presumes sale over a reasonable period of market exposure to maximize expected return, and forced liquidation presumes less than a reasonable period of exposure.

Which one applies

For buying or selling equipment, BDC says which value to use depends on the circumstances of the purchase or sale. Its example is that a regular transaction between two willing parties usually relies on fair market value, while liquidation value may be involved in a bankruptcy. For continued-use purposes, such as financial reporting or security for financing, BDC says it is typical to determine fair market value, though some banks may collateralize equipment based on its forced liquidation value. Ask a lender which basis it uses.

The same idea for a whole business

The CRA’s Information Circular 89-3 discusses liquidation value for businesses, not equipment. It says the liquidation value approach is generally used where the business is not a viable ongoing operation, where a going concern’s value is related to the liquidation value of its underlying assets, and as an aid in determining fair market value on a going concern basis. CBV Institute defines liquidation value as the amount, net of relevant costs, realized if the business is terminated and the assets sold. See original cost or current worth.