Machinery & Technical Specialties: Forced-Liquidation vs. Orderly Value Conflict
A lender forecloses on a plastics injection-molding operation. You are engaged to value a 2016 500-ton molding machine and associated robotics for a liquidation scenario. The machine is installed, under power, and running three shifts. Comparable sales data: two orderly-transaction sales of similar machines at $410K and $430K; one auction sale of a comparable machine at $245K; dealer quotes to acquire inventory at $260K-$285K. Removal and rigging costs are estimated at $38K; the machine weighs ~85 tons and requires specialized transport. The lender's workout officer wants 'the highest defensible number' because the loan balance is $520K and he needs the collateral to 'cover.' The engagement letter specifies 'Orderly Liquidation Value.'
1. Which value conclusion is appropriate, and how do you handle the lender's pressure?
Read the worked answer
The engagement specifies Orderly Liquidation Value, so the auction result ($245K) and dealer 'buy' quotes ($260K-$285K) are the most relevant indicators, not the orderly fair-market sales ($410K-$430K) which reflect continued-use retail transactions. A defensible OLV would be supported near the dealer-quote/auction range, adjusted for the specific machine's condition and the removal burden. The lender's desire for a number that 'covers' a $520K loan is irrelevant and must be resisted: value is a function of the defined premise, not the loan balance. Document the pressure in the workfile, restate the premise in the report, and if the lender wants a different premise (e.g., Fair Market Value in continued use), that requires a separate engagement and scope - not a re-labeling of the same analysis.
2. How do rigging/removal costs enter the OLV conclusion?
Read the worked answer
In a liquidation premise, the net realizable value to the lender is the gross realizable value less costs to convert to cash - removal/rigging ($38K), transport, and selling costs. So if gross OLV is, say, $285K, net-to-lender is roughly $285K − $38K − selling costs. Whether to deduct depends on the defined premise: some OLV definitions are 'gross, in-place' and some are 'net of removal.' The appraiser must state which and be consistent. Critically, the 85-ton weight and specialized transport mean removal costs are material and must be disclosed - a buyer at auction factors them into the bid, which partly explains the $245K auction result vs. $410K-$430K orderly sales.
3. What internal-consistency check should a reviewer apply to this MTS report?
Read the worked answer
Check that (1) the premise of value stated matches the data relied on - if OLV, the auction and dealer quotes should drive the conclusion and the orderly retail sales should be reconciled or explained; (2) the level of value (in-place, installed, under power) is consistent with the removal-cost treatment; (3) the report does not cherry-pick the high orderly sales while labeling the result 'liquidation'; and (4) the conclusion is not reverse-engineered to the $520K loan. A red flag is a conclusion that sits between the auction and orderly-sale ranges without a bridge explaining the gap. The reviewer should require the bridge or conclude the value is not credible.