FMV vs. OLV vs. FLV: Equipment Valuation Premises Explained

Why Value Premises Matter

The value premise defines the hypothetical conditions of the sale — who is selling, why they are selling, how much time is available to market the asset, and what the likely buyer pool looks like. It is the single most important assumption in any equipment appraisal because it shapes every aspect of the analysis that follows, from which comparable sales are relevant to how adjustments are applied.

Selecting the wrong premise is one of the most consequential errors an appraiser can make. An FMV conclusion delivered when a lender needed OLV can overstate collateral value by 30–50% or more, depending on equipment type and market conditions. Conversely, providing FLV when the client needed FMV will understate value and could cause a borrower to miss out on financing or a seller to leave money on the table.

Each premise answers a fundamentally different question about the same piece of equipment. FMV asks what the asset would sell for under optimal conditions. OLV asks what a motivated seller could recover with a reasonable marketing period. FLV asks what would happen at a properly advertised public auction with a compressed timeline. The equipment does not change — but the hypothetical scenario does, and that scenario drives the value conclusion.

Before beginning any appraisal engagement, the appraiser must clearly establish which premise (or premises) applies. This is not a decision the appraiser makes in isolation — it flows directly from the intended use of the appraisal and should be confirmed with the client, their counsel, or the lending institution before any fieldwork begins.

Fair Market Value (FMV)

Fair Market Value is the price at which property would change hands between a willing buyer and a willing seller, neither being under compulsion to buy or sell, and both having reasonable knowledge of relevant facts. This is the most widely recognized value premise, and it assumes the most favorable selling conditions of the three.

Key Characteristics

• Adequate marketing time — The seller has sufficient time to expose the equipment to the broadest possible buyer pool through appropriate marketing channels.
• Arm’s-length transaction — Buyer and seller are unrelated parties acting in their own self-interest, with no unusual pressure or special relationships influencing the deal.
• Informed parties — Both buyer and seller have reasonable knowledge of the equipment’s condition, utility, capabilities, and the current market for similar assets.
• Neither party under duress — The sale is voluntary. Neither side is compelled to transact by financial distress, court order, or time pressure.

When FMV Is Used

• IRS tax reporting — Estate and gift tax calculations, charitable donation deductions for contributed equipment exceeding $5,000, and other federal tax purposes.
• Financial reporting — GAAP and IFRS fair value measurements for purchase price allocation, impairment testing, and lease accounting under ASC 842.
• Mergers and acquisitions — Purchase price allocation, due diligence, and negotiation between buyers and sellers of businesses.
• Divorce proceedings — Equitable distribution of marital assets, where courts need a neutral value representing what the equipment would sell for in the open market.
• General business planning — Internal decision-making around fleet replacement, capital budgeting, and asset management.

FMV typically produces the highest value of the three premises because it assumes optimal selling conditions with no time pressure or compulsion. An important nuance: the IRS definition of FMV (rooted in Revenue Ruling 59-60) may differ slightly from USPAP’s definition in specific applications. The appraiser must specify which definition applies in the scope of work and report.

Orderly Liquidation Value (OLV)

Orderly Liquidation Value is the estimated gross amount that could be realized from a sale, given a reasonable period of time to find a purchaser, with the seller being compelled to sell on an as-is, where-is basis. Unlike FMV, OLV assumes that the seller is motivated or compelled — this is not a voluntary transaction between parties with equal leverage.

Key Characteristics

• Reasonable but not unlimited marketing period — Typically 90 to 180 days, depending on the equipment type and market. Enough time to reach likely buyers through dealer channels, online marketplaces, and industry contacts, but not the extended exposure period assumed under FMV.
• Seller is motivated or compelled — The seller has a reason to transact, whether it is a lender exercising remedies, a business winding down operations, or a borrower needing to convert assets to cash.
• Equipment sold in place, as-is — No warranties are provided. The buyer takes the equipment in its current condition and location. Removal, rigging, and transportation are typically the buyer’s responsibility.
• Buyer pool includes dealers and end-users — The marketing period is long enough to attract both equipment dealers (who buy for resale) and end-users (who buy for their own operations), though the compelled nature of the sale may reduce the final price compared to FMV.

When OLV Is Used

• Asset-based lending (ABL) — OLV is the primary premise for setting advance rates against equipment portfolios. Lenders use OLV to determine how much they can safely lend.
• SBA loan collateral — SBA 7(a) and 504 loans frequently require OLV for equipment collateral valuations.
• Commercial lending — Banks and credit unions use OLV to assess equipment collateral for term loans and lines of credit.
• Bankruptcy planning — Debtors and creditors use OLV to project recovery values under reorganization plans.

OLV is the workhorse of lending appraisals. It represents what a lender could realistically recover if it needed to liquidate collateral in a commercially reasonable manner — not a fire sale, but not the patient, optimized sale assumed under FMV either. OLV typically falls in the range of 60–80% of FMV, depending on equipment type, condition, age, and current market demand.

Forced Liquidation Value (FLV)

Forced Liquidation Value is the estimated gross amount that could be realized from a properly advertised and conducted public auction, with the seller being compelled to sell with a sense of immediacy, on an as-is, where-is basis. FLV represents the most pessimistic of the three standard premises — it assumes that time is not on the seller’s side.

Key Characteristics

• Compressed timeline — Typically 30 to 60 days, or immediate sale at a scheduled auction. There is not enough time for extended marketing or private negotiations.
• Auction conditions — The sale is conducted through a public auction format. Bidding dynamics, attendance, and market timing all influence the result. Auction fees (buyer’s premiums, seller’s commissions) are part of the transaction structure.
• Buyer pool is auction-oriented — Auction buyers tend to be dealers, brokers, and bargain-seeking end-users who expect to purchase below retail or private-sale pricing. The competitive bidding environment can produce unpredictable results.
• No warranty, no installation — Equipment is sold strictly as-is, where-is, with no representations about condition, functionality, or remaining useful life.

When FLV Is Used

• Worst-case lending analysis — Lenders may request FLV alongside OLV to understand the floor value of collateral in a distressed scenario.
• Bankruptcy proceedings — Chapter 7 liquidations and court-ordered sales often proceed under forced conditions where FLV is the most realistic premise.
• Court-ordered sales — Judicial sales, receivership liquidations, and foreclosure proceedings where the timeline is dictated by the court.
• Distressed asset situations — Plant closings, business failures, and scenarios where the seller must convert assets to cash immediately.

FLV typically falls in the range of 40–70% of FMV, though the spread varies significantly by equipment type. Equipment with active auction markets — such as construction machinery, transportation assets, and agricultural equipment — tends to have a smaller gap between OLV and FLV because there are established auction channels and regular buyer attendance. Highly specialized or niche equipment tends to have a much larger spread because the buyer pool at auction is smaller and less informed about the asset’s true utility.

Side-by-Side Comparison

The following table summarizes the key differences between the three standard value premises. Use it as a quick reference when scoping assignments or explaining premise selection to clients.

Choosing the Right Premise

The intended use of the appraisal determines the premise — not the appraiser’s preference, and not the client’s desire for a higher or lower number. The premise must be appropriate for the decision the appraisal will support. Always confirm the required premise with the client before starting any work.

Here are the most common pairings between assignment type and value premise:

• SBA and commercial lending — OLV is the standard. Some lenders also request FLV as a secondary value to understand worst-case recovery.
• Asset-based lending (ABL) revolving lines — OLV for setting the advance rate (e.g., 75–85% of OLV). FLV may be included for floor analysis or credit committee review.
• IRS tax reporting — FMV is required for estate tax, gift tax, and charitable donation deductions. The IRS definition applies.
• Financial reporting (ASC 820 / IFRS 13) — Fair Value, which is conceptually similar to FMV but uses market participant assumptions rather than the specific knowledge of actual buyer and seller. The appraiser should note this distinction in the report.
• Insurance — Replacement Cost New or Replacement Cost New Less Depreciation. These are distinct from FMV, OLV, and FLV and reflect what it would cost to replace the equipment with a functionally equivalent asset. Do not confuse insurance values with the three liquidation-based premises.
• Bankruptcy — OLV or FLV, depending on the liquidation plan. A Chapter 11 reorganization may use OLV; a Chapter 7 straight liquidation is more likely to use FLV.

When in doubt about which premise applies, ask the client or their legal counsel what decision the appraisal will support. A five-minute conversation at the start of the engagement prevents a costly rework later.

What Lenders and Clients Expect

Lenders are the most frequent consumers of equipment appraisals, and their expectations are specific. Understanding what credit committees and loan officers need from an appraisal will make your work more useful and reduce revision cycles.

Most lending institutions want OLV as the primary value conclusion, often with FLV included as a secondary or supplemental figure. The lender uses these values to calculate advance rates — the percentage of appraised value they are willing to lend against. A typical structure might be 75–85% of OLV as the borrowing base for equipment collateral, with the FLV serving as a stress-test floor.

Different equipment types receive different advance rates based on marketability, depreciation risk, and obsolescence exposure. General-purpose equipment (forklifts, standard CNC machines, over-the-road trucks) typically commands higher advance rates because it is easier to liquidate. Highly specialized or single-purpose equipment receives lower advance rates because the buyer pool is smaller and liquidation takes longer.

Credit committees expect several things from equipment appraisals:

• Clearly stated premise — The report must identify the value premise on the first page and in the scope of work. Ambiguity about which premise was used undermines the entire conclusion.
• Reconciliation when multiple premises are provided — If the report includes both OLV and FLV, the appraiser should explain the relationship between them and why the spread is what it is for that specific equipment type.
• Comparable sales at the appropriate level — Comps used to support an OLV conclusion should reflect liquidation-level transactions, not retail asking prices or FMV-level private sales. Using retail comps without adjustment in an OLV engagement is a common and serious error.
• Explanation of adjustments — The report should document how and why adjustments were made to comparable sales for differences in age, condition, configuration, and location.

Common Premise Mistakes

Even experienced appraisers make premise-related errors. These mistakes can undermine the credibility of the appraisal and create real financial risk for lenders and clients who rely on the conclusions.

1. Applying FMV comps to an OLV assignment without adjustment — This is the most common error. Using private-sale or retail comparable data to support an orderly liquidation value without applying an appropriate discount for the compelled-sale conditions results in an overstated OLV. The appraiser must account for the difference in selling conditions between the comp transaction and the premise of the assignment.
2. Providing a single value without specifying the premise — A value conclusion without a clearly stated premise is incomplete and non-compliant with USPAP. The reader has no way to know what selling conditions the value assumes, making the number essentially meaningless for decision-making purposes.
3. Using retail asking prices as evidence for liquidation values — Asking prices are not transaction data. They represent what a seller hopes to receive, not what a buyer actually paid. Asking prices are even less appropriate for liquidation-premise assignments, where the seller is compelled and has limited time.
4. Failing to account for removal and installation costs in OLV and FLV — Heavy or specialized equipment may require significant rigging, disassembly, and transportation to move from the seller’s facility. These costs reduce what a buyer is willing to pay and must be considered in liquidation-premise valuations.
5. Not specifying whether values are in-place/installed or removed — There is a meaningful difference between the value of a piece of equipment installed and operational in a facility versus the same equipment sitting on a trailer ready for shipment. The report must be clear about which condition the value assumes.
6. Ignoring the difference between gross and net proceeds — OLV and FLV are typically expressed as gross amounts (before selling costs, commissions, and fees). If the client or lender needs net proceeds, the appraiser must clearly state whether the values presented are gross or net and account for estimated selling expenses.