CAPITAL STRATEGY INSIGHTS: Reimagining the Process #012
#012 Strategic Capital Planning – FMV is not an Algorithm, Part 2
In the last post we talked about Fair Market Value (FMV) and how it contributes to ERUL, setting the table for this post for continuing the discussion why FMV is not an algorithm.
As I indicated in Post #011, FMV is an opinion of the appraiser, and that opinion should be formed through research and analysis, using various data sources. The appraiser should understand current market activity, which fluctuates over time. Additionally, the appraiser should have both experience and expertise, knowing how to arrive at a valuation and concluding that the value is as accurate as possible. It is a real time opinion utilizing historic and current information.
Each appraisal subject asset has a unique story to tell:
- What is the history of this modality? Is it new or mature?
- What is the history of the manufacturer? Are they a market leader or a new entrant?
- What is the market history with the modality? With the manufacturer?
- What is the age of the subject asset? Where is it in the expected life of the modality?
- What is the condition of the subject asset?
- What has it sold for in the past, and what is the current market for this device?
These are several of the data points to be considered. These are all variables that change over time and impact the “snapshot” of value at a given time.
So, consider the data that has to be in place for an algorithm to provide an accurate asset value:
- Historic data on the value of the modality, by manufacturer and model
- Historic data on useful life and remaining life
- Regular and current market changes and fluctuations updates
When a company promotes that they are providing FMV through software, my first questions are:
- Based on what data?
- Where did it come from? Actual transactions?
- What sample size?
- How often is it updated?
That said and in full disclosure, my firm offers an algorithm that calculates value over time; however, we do not present that as an appraisal. Why? Too many assumptions in the calculations that yield results that are in the ballpark but not at the seat. And we have lots of data. Close from an algorithm is good, but close will either cost money by replacing the asset too soon, or not replacing it soon enough. This is why when one is determining the ERUL on either a big-ticket asset or group of like assets, one should know what they are worth, and determine their future value so as to understand when they go into negative equity.
Again, historic data and current market conditions are key to valuations. Appraisals are an informed, expert, researched, and current opinion of value. Algorithms, while useful, if they lack depth of appraisal data, are not able to support real time market data, can’t adjust for the nuances of condition and/or age and/or obsolescence for identical makes and models of subject assets, the outcome is not an accurate appraisal.
Not quite sure what the next topic will be. I had one planned, but we might need something lighter to consider. Until then, be well and as always, feel free to comment at email@example.com.