Archive for the ‘Asset Inspection’ Category
Expansion Financing in a Down Economy
While the economy is showing signs of improvement, many small businesses are still finding it difficult to stay afloat. However, there are a number of businesses that have been able to not only survive, but succeed despite this economy. For companies like this, a down economy can be seen as a time for growth.
A period of growth, for some companies, might require expansion financing to obtain capital to grow their business. Such financing could be used to support the business’s growth through endeavors such as hiring additional staff, purchasing equipment, acquiring real estate, or ramping up marketing efforts.
Businesses need to demonstrate the clear value of their growth in order to justify financing. While the sources of financing can vary greatly – from banks to friends and family members – for the most part, lenders will require detailed, complete business and operating plans. As we discussed in our last post, lenders are conducting more vigorous due diligence than in the past. So, in addition to the traditional business information, lenders are requiring third-party appraisals to provide greater protection for themselves and their investments.
An appraiser must be able to take into consideration all aspects of a business, including operating costs, assets, equipment, revenue, etc. in order to establish a complete picture of the value of a business. Business potential, economic growth, and market growth are other factors that need to be taken into account for this type of appraisal.
In addition to providing clarity to a potential lender, an appraisal can also help business owners make crucial decisions in a time of economic uncertainty.
By: Present Value
Case Study: Pre-Loan Asset Verification
Asset verification is a significant part of Present Value’s services. We’ve written about it in the past here and here. Today, we’ll highlight a real-world example that demonstrates the importance of asset verification for responsible due diligence.
Present Value had a client who owned a strip mall that included a movie theater. The movie theater began to lose business, the theater owner could no longer pay rent to the property owner, left the strip mall, and defaulted on his equipment loan. According to the terms of the lease, the property owner could take over everything in the property in 45 days.
Present Value was asked to appraise the equipment in the movie theater and came up with a value one-fifth the value of the loan. The reason for the huge discrepancy was that when the movie theater operator took out his equipment loan, he misrepresented the value and type of movie equipment he owned and planned to purchase. As a result, when the theater owner defaulted on the loan, the lender lost quite a bit of money.
This problem could have been prevented if the lender had requested an asset verification prior to approving the loan. If this had been done, the lender would have had assurance that the equipment it was supporting was equal to the value of its loan.
By: Present Value
The Cost Approach
Today is our second installment in our series about the different methods used by real estate appraisers to determine property value. On Tuesday, we discussed the sales comparison approach. Today, we’ll cover the cost approach.
To determine a property’s value using the cost approach, an appraiser would first estimate the value of the property if it were vacant. Then he or she would add that value to the current cost of building any structures that are on the property. The appraiser would then figure out the amount of depreciation on the structure and subtract that from the total. Depreciation on the land itself is rarely considered because unless there has been erosion, improper land use, or zoning changes, land typically does not depreciate.
The cost approach is usually used on newer structures, but tends to be less reliable for older buildings and properties. It is most commonly used for public buildings that serve a special purpose, such as a school or a church. The sales comparison approach, which we discussed earlier this week, doesn’t work for public buildings because it is difficult to find recently sold comparable properties. And the income approach, which we’ll discuss in a later post, doesn’t work for a public building appraisal because public buildings typically don’t earn income.
By: Present Value
Asset Verification
Oftentimes as part of the operation of their businesses, business owners will secure financing or investors to support the purchase of machinery and equipment. Investors and lenders, who have their money tied up in a business, want to and need to know where and how their money is being used.
While it is of course necessary to know the value of the said assets, sometimes investors simply want to ensure that their investment is being used in the manner that the business owner has reported with regard to machinery and equipment assets. Asset verification can be used to determine that the physical assets of a business exist. For a construction business, this could be verifying that there are three backhoes, five dump trucks, eight Bobcats, etc. For a private oral surgeon’s office, it could be one x-ray machine, four dental sinks, four dental chairs, etc.
In a previous post, we discussed Present Value’s inventory control services. In addition to this, Present Value can provide investors and lenders with asset verification reports that confirm a business’s physical assets.
By: Present Value
Inventory Control Services
Business lenders occasionally need to perform inspections on the businesses to which they lend because they need to know that the business assets they support are physically on the company’s premises, year after year. There are two main ways this task is performed. Either someone goes to the business and counts each item in question (e.g., computers, furnishings, inventory), or the items can be barcoded, scanned, and managed through a spreadsheet. Once the assets are initially barcoded, future inventory inspections will be much easier to conduct.
As part of its business valuation branch, Present Value can conduct these inspections on a lender’s behalf. Depending upon the lender’s needs, Present Value will go to the property and either physically count the assets in question or barcode them for simplified, electronic management.
Please contact us for more information about how Present Value can help you with your asset inspection and inventory control needs.
By: Present Value
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