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Four Uses for Fair Market Value Data

August, 2005

Any company that invests in information technology has an ongoing need for fair market values (FMV) of IT equipment. Although executives readily see the usefulness of FMV data when they buy or sell used equipment, in fact there are three other reasons that accurate FMV data is essential to a well-managed IT function. When considered together, these four reasons suggest that IT organizations would do well to ensure that FMV data is readily available.

So, what are the four uses for FMV data?

  1. Acquisition and Disposition of Computer Equipment
    As we just mentioned, FMV data is essential when companies buy or sell used computer equipment. As technology continues to evolve, companies often find themselves with equipment that is no longer needed. Or, conversely, they find that used equipment may be adequate to do the job. Whether one is on the buyer side or the seller side, the use of an independent FMV report can give the user a guide as to what to expect in terms of a fair price in the transaction.

    An FMV report cannot be exact because of the many variables that enter into the transaction such as quantity, condition, maintenance qualified, reconfiguration, and motivation of both parties to the transaction. Nevertheless, the FMV report offers the user valuable information going into the negotiations. Unless the number of units to be purchased is unusually large, the end-user, wholesale or orderly liquidation price in the FMV report should be within a few percentage points of the actual transaction price. Knowing the FMV in advance of negotiations ensures that the buyer does not pay too much, and that the seller does not receive too little.
  2. Evaluating Lease Purchase Options
    Many companies will come to the end of a lease and decide that they want to buy out the leased equipment. Companies may desire to exercise a buy-out option for any number of reasons: there may be a cap on new hardware purchases, there may not be enough of a demand for new equipment; delivery of new equipment on-order is delayed; or the lessee may have missed a notification deadline and be obligated for another year of lease payments unless they purchase the equipment. No matter the reason for the buy-out, an independent FMV report will assist the company in determining a fair and equitable price.
  3. Reducing Property Tax Obligations
    Many companies have idle or surplus computer assets, which in many cases have not been taken off the property tax records of the company as reported to the county assessor's office. If such equipment is truly idle and surplus and will not be put back into service, the equipment needs to be disposed of according to its "Orderly Liquidation Value" or "Forced Liquidation Value" and reported to the firm’s accounting office for deletion from the property tax records.

    Independent FMV reports can be used to determine a liquidation value for disposal as well as to adjust the values of assets previously reported on property tax statements to the taxing jurisdiction. In many cases, assets that are not deleted from property tax records continue to be assessed at up to 20% of the acquisition price.

    Having access to a library of historical FMV reports can give an organization solid ground on which to appeal property tax assessments for prior years. Having historical FMV reports on file can also be a strong defense in a tax audit.
  4. Evaluating Merger and Acquisition Targets and Securing Lines of Credit
    When a company undertakes a merger or acquisition, it needs an accurate assessment of the fair market value of the IT assets of either or both companies. Having access to accurate FMV data will ensure that computer equipment that is part of the deal is fairly valued, whether such hardware is owned or leased, and that any potential liabilities are also determined.

    Similarly, when a company is applying for an equity line of credit, the financial institution may request a fair market value analysis of IT assets used to secure the credit line.

Developing Fair Market Value Reports
Faced with the need for FMV data, some organizations attempt to develop this information internally. But few IT managers have the background and experience required to do the job. Even if they have the expertise, they often do not have ready access to enough data to compute a fair valuation. Furthermore, valuations developed in-house lack the credibility of a reputable third party.

Maintaining a library of reputable and reliable valuation data should be a part of every IT and tax department library. Computer Economics has been providing FMV reports for IT user organizations and financial institutions for over 20 years, along with residual value forecasts, vendor pricing, and other analysis of computer equipment values. This information is available from Computer Economics through an annual subscription or may be purchased on a one-time basis. A single use of this information in a sales or leasing transaction, or property tax assessment, often pays for the cost of an annual subscription many times over.

For more information on gaining access to our fair market valuation data, please CONTACT US.

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