Introduction When interrelating the valuation of underlying tangible and intangible assets into the business valuation situation, ask yourself the following questions. • What is the business purpose of this appraisal? • What are the ancillary uses you may be considering for the appraisal service? • What kind of business is the subject? • Is the firm profitable? If the firm is profitable the valuation of the underlying tangible assets may not be required. Usually underlying tangible assets valuations are not required for service companies, older manufacturing, or process companies. If the firm is not  profitable it could indicate that the value of the underlying assets may drive or significantly influence the final value conclusion. This may apply to real property investment and management firms, newer manufacturing, or process companies. Each discipline (financial, real property, personalty) has its own language. The terms used in one discipline’s language, even though the same words, are not necessarily understood and used in a similar manner in another discipline. Knowledge of the terms and general procedures of disciplines other than your own is critical to being a “professional senior appraiser” within your own discipline. Situation #1 Asked to appraise the real property of a sawmill, with someone else appraising the machinery and equipment. The process involves debarking logs, cutting logs into lumber, sorting this rough lumber, drying the rough lumber, and dressing the rough lumber. The sawmill had a new dry kiln made of concrete block, with drying machinery and equipment, costing $300,000 in 2005. Procedure: Most often the real estate appraiser would consider this asset to be personalty and not appraise it. The machinery and equipment appraiser, since the appraisal is being conducted under a “removal” assumption, would give little value to the structure, and appraise only the heating and circulation mechanisms, some $50,000. The possible result is a loss of $250,000 of value under a removal concept. Result: Inform the lender of the situation and include the asset within the context of real property, since it likely would be sold with the real property and is integral to it. The value added to the real property appraisal would be $150,000. Situation #2 Federal income tax reporting allocation of tangible and intangible assets. Procedure: Valuation of the business enterprise. Ascertain amount available for all fixed assets, after calculating normal working capital requirement. Value tangible and intangible assets individually (per request of client though not necessary since intangibles have a 15-year reporting life, except for software). Machinery and Equipment (3-7 year lives) • In continued use value • Consider engineering and design of facility and proportion to individual assets • Include special assets such as dies, jigs, molds, etc. Real Property (5-39 year lives) • Value land as vacant and available (no life assigned) • Value land improvements (15-year life) • Value basic building structure (39-year life) • Value components of construction, for example a process water supply system would be done separately as machinery and equipment (5-7 year life) • Overall pull as much out of the construction values into shorter lived machinery and equipment or land improvement categories (3-15 year lives) • Note: Ad Valorem and transfer tax reporting may appropriately require separate value concepts Intangible Assets • Separately value intangibles, some which may be separable from the business and others which may be integral Situation #3 Meat packer seeking funding based upon tangible assets being used as collateral. A sophisticated lender requests the value of the underlying assets in a “normal” sale or purchase situation. Normal means that the assets of the business are sold to a new buyer using the assets in their current location. A usual asset based lender would have asked for the Orderly Liquidation Value of the assets, which is less than Fair Market Value -  Removed. The preliminary value indicators are as follows: • Fair Market Value in Continued Use with Assumed Earnings (Personalty) - $4,000,000 • Fair Market Value - Removed (Personalty) - $2,500,000 • Orderly Liquidation Value (Personalty) - $2,000,000 • Market Value (Real Property in Continued Use) - $2,000,000 • Market Value (Real Property as Alternative Use) - $1,000,000 Standard Bank Asset Based Financing Approach: Availability is calculated as 80% of Orderly Liquidation Value (Personalty) or $1,600,000, plus 50% of Market Value (Real Property as Alternative Use) or $500,000, totaling to $2,100,000. Possible Insurance Company Asset Based Approach: Availability is calculated as 80% of Fair Market Value in Continued Use with Assumed Earnings (Personalty) or $3,200,000, plus 50% of Market Value (Real Property as Alternative Use) or $1,000,000, totaling to $4,200,000. Issue: Which number is correct? $2,100,000 or $4,200,000, with the insurance company being the likely lender and the deal not being done by the borrower at $2,100,000. Answer: It depends upon the economic support offered by the business enterprise. Procedure: Fair Value of the tangible and intangible assets used in the business is the greater of the Net Realized Value of the tangible assets or the value of the business. Ascertain the value of the business enterprise as a going concern (net worth plus normal long term debt = total invested capital). The total invested capital (”BEV”) equals the Fair Market Value in Continued Use (FMV/CU) of the net assets. Net assets include the net working capital plus other tangible and intangible assets. Compare the BEV to the FMV/CU of the tangible assets plus the net working capital restated to market. If BEV is greater than FMV/CU there is economic support for the continued use asset values. If not, then there are not any intangible assets and the FMV/CU of the tangible assets is limited to the BEV less net working capital. Example A (there is adequate economic support): • BEV = $8,000,000 • Net Working Capital = $1,000,000 • Indicated FMV/CU of Personalty = $4,000,000 • Indicated FMV/CU of Real Property = $2,000,000 • Total Indicated FMV/CU of All Tangible Assets and Intangible Assets = $7,000,000 Result: Therefore, FMV/CU would be the proper tangible asset value ($6,000,000) for lending purposes, with also there being $1,000,000 of intangible assets.  Availability is $4,200,000. Example B (there is not adequate economic support): • BEV = $6,000,000 • Net Working Capital = $1,000,000 • Indicated FMV/CU of Personalty = $4,000,000 • Indicated FMV/CU of Real Property = $2,000,000 • Total Indicated FMV/CU of All Tangible and Intangible Assets = $7,000,000 Result: Therefore, the FMV/CU maximum aggregate value supported for personalty and realty is $5,000,000, with there not being any intangibles value. Availability is 83% ($5,000,000/$6,000,000) of $4,000,000 x 80% or $2,600,000, plus 83% x $2,000,000 x 50% or $830,000, calculating to $3,430,000. The availability is thereby increased over a bank’s asset based lending perspective, and from the insurance company lender's perspective they have comfort that they are funding based upon reasonable Fair Value conclusions. Further, the initial funding occurred with the firm restructuring its debt and making necessary capital asset improvements, whereby throughput and profitability increased.