One of the most common misconceptions in industrial asset valuation is assuming that an asset “has a value”. It does not: it has several valid values at the same time, and each financial transaction needs a specific one. Asking for the wrong figure is a frequent cause of rejection by a bank’s credit committee — and of fruitless arguments between buyer and seller who are, in reality, talking about different bases of value.
What a basis of value is (and why there are several)
A basis of value is the set of assumptions under which the value of an asset is estimated: how much time the seller has to sell, whether they are compelled to do so, and under what conditions the transaction takes place. Bases of value are not invented by each appraiser: they derive from the International Valuation Standards (IVS) issued by the IVSC and from the RICS valuation standards — the Red Book, which require every report to state which basis has been used and under which premises.
Three variables separate one basis from another:
- Market exposure period: how long the asset can be offered for sale before the transaction must close.
- Seller compulsion: whether the seller sells by choice or because there is no alternative.
- Conditions of sale: asset installed and operating, or dismantled and sold “as is, where is”; a negotiated private sale or an auction with a fixed closing date.
Moving those three levers produces the three bases that dominate practice in machinery and industrial assets: FMV, OLV and FLV.
FMV — Fair Market Value
FMV is the estimated price at which the asset would change hands between a willing buyer and a willing seller, both informed, without compulsion and after proper marketing in an open market. It is the basis that corresponds to the market value concept of the Red Book and the IVS.
Its assumptions: a sufficient exposure period — whatever the market needs for that type of asset —, no time pressure on either party, and a transaction under normal conditions, with the asset usually installed and operational. That is why FMV is the reference value: the highest of the three and the one assumed when speaking of how much an asset is worth without further qualification.
It is the basis that general practice applies to purchases and sales of assets or complete production lines, to capital contributions, to industrial M&A processes and as the starting point of any analysis.
OLV — Orderly Liquidation Value
OLV is the gross amount that would be obtained by selling the asset within a reasonable but limited period — typically six to twelve months —, with a seller who is compelled to sell but still controls the process. There is time to segment the fleet, find the right buyer for each machine and negotiate; what there is not is unlimited time, and the sale must close.
Its assumptions: a constrained exposure period, moderate seller compulsion and a professional, orderly marketing effort, often with the assets already deinstalled or pending removal. OLV is lower than FMV precisely because the clock is running against the seller.
It is the figure banks watch most closely in asset-backed finance: it answers the question “if I have to enforce the security, how much do I actually recover?”. In the general practice of collateralised lending and ABL, the borrowing base is built on OLV, not on FMV — we explain that mechanism in detail in the article on ABL and the borrowing base.
Turning that figure into cash is a separate exercise: it is an orderly asset recovery and sale process that decides how much of that theoretical OLV is actually collected.
FLV — Forced Liquidation Value
FLV is the gross amount that would be obtained in an immediate sale under pressure, usually a properly advertised public auction with a fixed closing date. The seller controls neither the timetable nor the price: they accept the best bid available on the day.
Its assumptions: a minimal exposure period, maximum seller compulsion and “as is, where is” conditions of sale, with the buyer assuming dismantling, transport and risk. It is the lowest of the three values because every lever works against the seller at once. It appears in insolvency scenarios, in cessation-of-activity auctions and as the floor of any lender’s risk analysis.
RCN and DRC — the replacement bases
Alongside the three transaction bases there is another family: replacement. Replacement Cost New (RCN, VRN in Spanish practice) is what it would cost today to replace the asset with an equivalent new one, including transport, installation and commissioning; Depreciated Replacement Cost (DRC, VRD) adjusts that figure for the technical, functional and economic depreciation of the actual asset.
They are not sale values: nobody pays DRC for a used machine. They are cost bases, and that is why general practice uses them in industrial insurance policies and as an accounting cross-check. Confusing a replacement basis with a market basis is, in fact, the origin of the underinsurance we analyse in the article on industrial underinsurance.
Why the same machine has several values at once
The three transaction values coexist because they do not describe the asset: they describe sale scenarios. The machine is the same; what changes is how much time there is to sell it, who holds the upper hand and in what condition it is delivered.
In the market practice Capital Appraisal observes in its valuations and in secondary-market data (Indaxy), between the FLV and the FMV of the same fleet of assets there can be a difference of double or triple. Not because the asset is different, but because the conditions of sale are. That is why a professional report does not deliver a single figure: it delivers the ones the transaction needs, each labelled and justified.
A credit committee that receives a single number without knowing which basis of value it corresponds to cannot work with it. One that receives FMV and OLV, with their methodology, decides on the basis of data.
Value is not a property of the asset. It is the answer to a specific question —and the question must be framed before the figure is requested.
How to tell which basis applies in a report
A Red Book-compliant report states the basis of value explicitly; it does not leave it implied. When reviewing a valuation report, look for four elements:
- The declared basis of value, with its normative name (market value, OLV, FLV, RCN/DRC) and the reference standard (IVS / RICS Red Book).
- The effective date of valuation: values expire; a figure from two years ago does not support a decision made today.
- The sale premises: the assumed exposure period, the degree of compulsion, and whether the asset is valued installed and operating or dismantled for removal. Two reports on the same basis can differ on this premise alone.
- The special assumptions, if any: any assumption that departs from the asset’s actual situation must be identified as such.
If the report does not let you answer these four questions, the figure it contains cannot be used in any serious transaction — whichever it is.
Which figure does your transaction need?
- Sale of an asset or a production line → FMV.
- Asset-based lending (ABL) → FMV and OLV: the first sizes the asset, the second sizes the loan.
- Insurance policy renewal → RCN/DRC, the replacement bases.
- Insolvency liquidation or auction → OLV and FLV, depending on the time available.
These pairings reflect general market practice; each specific transaction may require nuances. At Capital Appraisal every valuation report states the basis of value used and, when the transaction requires it, provides the dual figure. If you do not know which one you need, the right question is not “how much is it worth” — it is “what for”.