Does Equipment Add to the Value of a Business?

Is equipment added on top of the value of the business?

No. When a valuer capitalises the earnings of a trade business, the equipment is part of what produces them. A plumber’s vans, an operator’s excavators and a landscaper’s trucks earn the profit that is being valued. The enterprise value that results is the value of the whole operating business, equipment included.

Adding the equipment on top would count it twice, once in the earnings and again as an asset. To see the size of the error, take the illustrative business used later in this guide. An earnings approach gives $900,000 for the operating business, and its plant has a market value of $965,000. Adding the two would give $1,865,000, more than double the earnings-based figure.

It is an easy error to make in an owner’s own estimate, and it can overstate value substantially. The right questions are narrower: which assets are needed to earn the maintainable earnings, which are not, what is owed on them, and whether the business is investing enough to keep them. The sections below take each in turn. Plant-heavy trades such as earthmoving are where the point matters most.

What counts as a surplus asset?

A surplus asset is one the business does not need to earn its maintainable earnings. Examples are an idle truck, a machine kept for spare parts, a vacant block of land or a boat. They are valued separately at market value and added to the value of the business, because the earnings include no return on them.

The difficulty is deciding what is surplus and what is spare capacity. A second excavator used for a few weeks in peak periods may be part of how the business wins work, while one that has not left the yard for 18 months is not. We look at hour meters, job records and fleet lists, and ask the owner how each major item is used.

Where a surplus asset has finance secured against it, that finance is deducted in the same way as any other debt. Whether and how an owner might sell surplus items is a commercial decision, and any tax on a sale is a matter for their accountant.

What happens to finance owing on equipment?

Finance does not change the value of the operating business, but it reduces what belongs to the owner. Earnings are measured before the cost of finance, so the enterprise value is the same whether the equipment is owned outright or fully financed. To reach the value of the owner’s equity, interest-bearing debt, including hire purchase, chattel mortgages and finance leases, is deducted.

The accounting for finance varies. Some arrangements show as a liability on the balance sheet and others do not, so we ask for finance schedules and contracts to be sure we have all of them, including any final balloon payment, which is a real obligation. How finance is treated for tax is a matter for the owner’s accountant.

In a sale, a buyer who takes over the finance pays the seller less cash, and one who clears it at completion pays more. The economics are the same either way, which is why the valuation deducts the debt and leaves the mechanics to the parties and their advisers.

Should equipment be valued at market value or written-down value?

Market value. The written-down value in the accounts is cost less depreciation, and depreciation follows accounting and tax rules, not the market. A machine can be written down to a low figure and still sell for a good price, or the reverse if it has lost value faster than it has been depreciated. The table shows an illustrative fleet.

The gap can run either way. Depreciation rates chosen for accounting or tax reasons can be faster or slower than a machine’s real decline in value, and demand for particular machines moves with the market.

Market value matters in two places: when assets are surplus and added at market value, and when net tangible assets are compared with the earnings-based value. It does not change the earnings approach itself, where depreciation is replaced by a normal cost of replacing plant, as the next section shows.

Why does an under-invested fleet reduce value?

Because reported profit looks better than it is. Depreciation in the accounts is a charge based on historical cost. If a business has been replacing machines more slowly than they wear out, reported profit is held up by spending that has been deferred, and a buyer will have to make it.

A valuer therefore replaces reported depreciation with an allowance for the cost of keeping the fleet at its current capacity, based on its age, condition, replacement cost and how long machines last in that kind of work. This is maintenance capital expenditure. Where machines are already overdue for replacement, the catch-up cost is a separate adjustment.

As an illustration, suppose two machines are already past the end of their useful lives and replacing them would cost $300,000 more than the normal allowance provides for. A buyer would reasonably take that into account in the price, and so does a valuer, either as a deduction from value or through the earnings, depending on timing.

The same logic works in reverse. A well maintained fleet supports value, not because the machines are added, but because the earnings are real and the risk of a large, sudden cost is lower. Our guide to EBITDA multiples for trade businesses lists fleet condition among the factors that move a multiple.

When do net tangible assets exceed the earnings-based value?

When the business does not earn enough on the assets it holds. It happens in plant-heavy businesses with thin margins, after a year of low work, or where machines are underused. A valuer treats it as a signal to ask why.

The more usual case is the opposite. A service business with few assets and strong earnings is worth far more than its net tangible assets, and the difference is goodwill: the value of its customers, reputation, licences and team. A plant-heavy contractor is more likely to sit close to its asset value, which is why the asset comparison matters most there.

The answer can be temporary, such as a poor year or a machine off the road, or structural, such as too much plant for the work available. If it is structural, the assets can support a higher value than the earnings do, because the owner has a realistic alternative: sell the plant and stop trading. The value that alternative produces, after the costs and time of selling, then acts as a floor. Tax on any sale is a question for the owner’s accountant.

On these figures the earnings approach gives an equity value of $180,000 and the net tangible assets are $435,000. The $255,000 gap is a reason to examine the business, not a conclusion. The assets would be worth that only if they could be sold at those prices after costs, and only if the owner would be willing to stop trading.

When is a specialist plant valuer needed?

When the equipment is a large part of the value or specialised enough that its market price is hard to judge. A business valuer is not a machinery appraiser. Where plant is significant, market values should come from a qualified plant and machinery valuer, and the business valuation relies on that evidence and says so. A plant valuation can also state the basis of value, for example value in continued use or on an orderly sale, which matters to the comparisons above. A plant valuer will typically want an asset register, serial numbers, hours, service history and photographs, so it pays to keep those records current.

Valuations involving significant plant are priced as complex valuations, from $2,995 + GST. See pricing, read about how we value, or start online and tell us what plant the business runs.