How plant and equipment affects business value

Why doesn't $3 million of machinery add $3 million?

Plant and equipment matters, but owning $3 million of machinery does not automatically add $3 million to enterprise value. When a business is valued on its earnings, the machines that produce those earnings are already part of the value. A buyer paying for the earnings of a precision machining business is paying for the output of its machining centres, not for the machines and their output separately.

The machinery can also be worth more or less than its share of that value. A five-axis machining centre bought three years ago for $900,000 adds nothing if the work that kept it busy has gone. A twenty-year-old press brake, fully written off, may underpin a profitable product line. What counts is the earnings the plant supports and what it will cost to keep supporting them.

Owners often quote the figure on their insurance schedule. That is usually replacement cost new, the highest of the possible values and the least relevant to what a buyer pays for a working business. The book value in the accounts is no better a guide, because it reflects purchase cost less depreciation chosen for accounting or tax purposes, not what the machines would fetch or earn.

Going concern or liquidation: which value applies?

The same machine can carry several values depending on what is assumed about its future.

For specialised industrial plant the gaps between these bases are wide. A production line built around one product, a large hydraulic press or a robotic weld cell may have a high value in use and a modest one at auction, once decommissioning, rigging, transport and making good a leased factory have been paid for. General-purpose equipment such as forklifts, standard lathes and vehicles holds its realisable value far better, because many businesses can use it.

The going-concern value applies while the business earns enough to justify its assets. When it does not, the value may be closer to what the net assets would realise in an orderly sale, after the costs of closing: selling costs, removal, make-good, and the redundancy and leave entitlements owed to staff. A rational owner would not sell the business for less than that. We test this floor in every asset-heavy valuation, and the report says which basis set the value.

What counts as a surplus asset in an industrial business?

A surplus asset is one the business does not need to produce its maintainable earnings. Common examples are a second press kept since a contract ended, a machine stripped for parts, a truck used twice a year, tooling for a discontinued product, and vacant land next to the factory. Surplus assets are valued separately at what they would realise after selling costs, and added to the value of the business.

The difficult cases are standby and peak capacity. A backup compressor or generator that keeps the plant running is part of the operation even if it rarely starts. A machine that only works during a seasonal peak may be what allows the business to win that work at all. We look at machine hours, job records and the production plan, and treat as surplus only what the business could sell without losing earnings.

A buyer will test any claim that an item is surplus, so it pays to document it. If a surplus item carries finance, the debt comes off at the same time as the asset is added. Any tax on selling it is a matter for your accountant.

How is equipment finance treated?

Earnings are measured before financing costs, so enterprise value is the same whether a machine is owned outright or fully financed. Finance changes how much of that value belongs to the owners. Hire purchase, chattel mortgages and finance leases are deducted, including any balloon payment, to move from enterprise value to the value of the shares.

Industrial businesses often finance plant through several lenders and equipment vendors, and not every arrangement is obvious from the balance sheet. We ask for every finance contract and the payout figure at the valuation date. A buyer will also search the Personal Property Securities Register, the national register of security interests over personal property such as machinery and equipment, and will expect any interest registered over plant it is buying to be released or accounted for at completion. A registration you have forgotten about, perhaps from a supplier or an old facility, is better found before a buyer finds it.

Rented plant is different. Its cost already sits in the earnings, and the plant is not part of the asset base. How lease accounting can change EBITDA without changing the economics is covered in EBITDA vs EBIT in industrial valuations.

What does the age of the plant tell a valuer?

Age and condition tell us about future capital spending, which a buyer will have to fund. We read the equipment register for purchase dates and replacement values, and ask about machine hours, maintenance records, recent breakdowns and parts availability. Controls the manufacturer no longer supports, a machine only one technician can service, and guarding that would not pass a current safety audit are all future costs.

Those findings go into the earnings rather than into an adjustment to asset values. We set a sustaining capital allowance that reflects the replacement cycle of the plant and test maintainable earnings after it. A business that has recently re-equipped needs less capital for several years and can support a stronger value. One that has deferred replacements to lift profit before a sale will see that profit discounted.

Do you need a plant valuer, a business valuer, or both?

They answer different questions. A plant and machinery valuer values individual items or a fleet, usually for finance, insurance or a sale of assets, and often reports more than one basis. A business valuer values the business as a whole: its earnings, risks and assets together, and the value of the shares or of the business being sold.

• A business valuation alone suits most sales, shareholder exits, restructures and estate matters where the plant is part of a profitable, continuing business.
• A plant valuation alone suits a lender wanting security values or an insurer setting cover.
• Both may be needed where earnings are thin and the asset floor matters, where a buyer's lender wants plant values as security, or where the price in an asset sale has to be allocated between goodwill and plant.

We value the business. A formal plant and machinery valuation is a separate discipline done by a plant and machinery valuer, and where a current one exists we can use it as an input. We will tell you when scoping if your matter needs one. Equipment-heavy sectors are covered on our machinery business valuation and transport and logistics business valuation pages, and the methods on how we value.

What does this look like in numbers?

The plant valuation still does useful work even though it is not added to the value. It identifies the surplus press, supports the asset floor test and gives a buyer's lender a security figure. If you are preparing for a sale, our business sale valuation page explains how the valuation fits into the process, and fees are fixed and shown on pricing. We confirm the fee in writing before we start. No hourly billing.