Equipment Appraisal Blog | Understanding Machinery Appraisals

When you own equipment, do you know about how long you can expect to be able to use it? Though most owners know roughly how long their equipment will last, determining a closer estimate is a difficult process. Fortunately, it's a process that is familiar to many experienced and certified equipment appraisers. Here's a quick look at the factors they consider when determining normal useful life in a piece of equipment.

Exactly how do you determine normal useful life in your equipment?

There are a wide range of factors that contribute to the lifespan of a piece of equipment. Here are just a few that are taken into account by a certified equipment appraiser during the process of calculating useful life.

• Environmental conditions. There can be a huge difference in the lifespan of a piece of equipment based solely on the conditions where it is stored and used. Equipment kept in a dusty warehouse with extremes of temperature and a leaking roof will almost certainly have a much shorter lifespan than one kept in a clean, dry workshop with climate controlled temperatures. Why? Moisture and humidity can lead to corrosion, while being used in hot, dusty conditions will lead to early breakdown of lubricants and cause excessive wear. Better conditions lead to a longer useful lifespan.
•  Suitability to the work. If the equipment you're using is underpowered for the work, it will be used at the high end of its range for most of its lifespan. That means it will overheat more often, breaking down lubricants and causing excessive wear on the components. This in turn leads to other parts failing and a shorter overall lifespan than may be expected of a piece of machinery better suited to the work at hand.
• Abusive usage. Is the equipment being used with care to preserve its condition? If it's being used incautiously or being beaten on to work controls, this level of abuse will quickly shorten its overall useful lifespan. As an example, we've all seen heavy equipment that has been bashed, dented and torqued early on in its lifespan, which quickly leads to early failure.
• Expected longevity of that line of machinery. Some brands have a reputation for excellence and longevity that comes into play. For example, a store brand bandsaw with a reputation for poor performance and shoddy manufacturing won't hold up nearly as long as a finely-crafted one that has been well engineered, created from the best materials and delivers superior performance time and again. When the second example is used, you can expect a much longer useful lifespan than you may otherwise anticipate.
• Regular maintenance and repairs. Though it seems like a simple step, regular maintenance in line with the manufacturer's recommendations can help ensure a much longer lifespan than equipment that has been neglected over the years. In the same vein, repairs that are caught early and dealt with quickly will help prevent damage to other components in the system.

Though the process of determining normal useful life in a piece of machinery is difficult, it's one that equipment appraisers are well versed in handling. By knowing when your equipment may fail, you can better plan for replacement and ensure you are still able to receive some resale value out of it. A certified equipment appraiser can help you determine this timeline for your machinery.

When you're considering having an equipment valuation performed, one option that is available is having a USPAP compliant appraisal performed. But what exactly is USPAP and how are appraisals that are compliant to USPAP standards different than other types of appraisals? Here's a quick look at this type of appraisal and how it can benefit you.

What exactly is a USPAP compliant appraisal?

Standing for the Universal Standards of Professional Appraisal Practice, this represents a set of standards set and published by the Appraisal Standards Board, which in turn is authorized by the Appraisal Foundation. The Appraisal Foundation itself was authorized by Congress to be the source of appraiser qualifications and appraisal standards. Though USPAP appraisal practices were initially focused on real estate appraisal specifically, it has since grown to encompass virtually every possible item that can be appraised in business. 

But how can these standards benefit your equipment appraisal? Because of the high scrutiny under which USPAP has been developed and the number of different situations under which it has been applied, it has developed into a comprehensive standard that deals well with a wide range of situations. Over time, it has been tested in a wide range of legal, financial, insurance and tax agency circles. For this reason, it has become a trusted standard that provides business and equipment owners with many benefits.

When a business suffers a loss, whether due to a fire, natural disaster or theft, insurance companies must be dealt with. If the equipment has not been properly appraised, the business has no basis for claiming a value different than the one generated by the insurance company. But the insurance figure may be a generalized average across the industry, which does not recognize that the equipment has been maintained exceptionally well in a clean, dry environment. How do you fight that figure?

What about when a tax assessment is much too high on a piece of machinery that was purchased as a disposable asset, intended to be used hard for a short period of time? When a piece of equipment is purchased as a stop-gap until something different can be made to work, it often doesn't receive the best treatment. Receiving a high assessment on a machine that has a much lower value can be difficult to fight.

When you're getting ready to expand your business, do you need to secure financing using your equipment as collateral? How can you prove to the financial institution how much it is worth? A business loan can be difficult enough without having to deal with proving your equipment's value to the bank.

Fortunately, when a USPAP appraisal is performed, it provides documentation of the machinery's value, which will hold up to strong scrutiny in a wide range of situations. The standard has been tested in many situations, so it is trusted as an accurate measure of value for the machinery in question. An appraisal report prepared by a certified appraiser ensures that your interests are being protected during the process.

Though a USPAP compliant appraisal seems like a complex process, its many benefits help provide you with a wide range of benefits. Because a certified appraiser is already familiar with these standards, they're able to properly apply them to your equipment appraisal to ensure you get an accurate value. Working with a certified equipment appraiser provides you with a range of protections that may last well into the future.

If you're thinking about having equipment appraised, you may have heard any number of appraisal types tossed around. One type of calculation that is commonly used is actual cash value. But what is this appraisal type, how is it performed and in what situations is it the best option to consider? Here's a quick look at these questions and how they apply to your machinery assets.

How is actual cash value determined by a certified equipment appraiser?

When it comes to determining actual cash value, many people are a bit confused over how this figure is calculated. It doesn't help that over the years, the court system has defined it in several different manners. Some people think it's the same as fair market value. Others think that it's replacement cost minus depreciation. Others think it's a hybrid of the two.

But what's the difference between these two approaches? Replacement cost minus depreciation can work in some situations, but not in others. A piece of machinery is lost in a fire, and the cost to replace it is $50,000. Depreciation on the original equipment would have been $5,000, so the equipment is valued at $45,000. Using fair market value, the same equipment may be older and fully depreciated. Using replacement cost minus depreciation may only provide a value of $5,000, but if the equipment was well maintained, it may still deliver years of reliable service. At this point, the value of $5,000 may be unrealistic for replacement in a loss.

Obviously, calculating actual cash value is a difficult process, with contradictory precedents depending on the state where the equipment or company is located and where you're going through legal or insurance issues. Despite the vague definition of actual cash value, many legal, financial, tax and insurance organizations still use it, leading to potential disputes between the customer and the company. Hiring a certified equipment appraiser to provide you with an appraisal report on the actual cash value of your equipment can help your side of the debate. 

In a number of court cases, the report or testimony of a certified equipment appraiser has made all the difference between a poor value and a fair value for equipment. A certified appraiser goes through an extensive educational process that includes learning which appraisal methods are applicable to which situations. Because they are taught proven methodologies that have been tested in legal, financial, insurance and tax circles, the reports they generate hold up well to scrutiny and are considered more reliable and accurate than a number of other sources you may be tempted to use in your situation.

A certified appraiser has the knowledge, experience and ability to help you fight a poor estimate of actual cash value. They've been trained to know in what situations different rules must be applied to determine a fair value for your equipment. When you work with a certified appraiser, you'll realize significant benefits for your machine values.

When you have actual cash value calculated on your equipment, you're gaining good insight into what your machinery is worth. However, if your appraisal isn't performed by a certified equipment appraiser, you may not be getting accurate information or an appraisal report that will hold up in financial, insurance, tax and legal circles. Make sure the appraiser you use is certified to ensure that your documentation will stand up to strong scrutiny in the future.

When we've been discussing equipment appraisals in the past, we've discussed a number of ways in which machinery may be appraised. But one type of appraisal we haven't gone into depth with is replacement cost new. Because it's only used in certain circumstances, it's a type of appraisal that many people are still unaware of. Here's a quick rundown of how it's different and a situation where it's commonly used.

How is replacement cost new different than other appraisals?

When you purchase insurance on your machinery, it's important to know what type of insurance you have in place. Replacement cost is a commonly used variety, but will only cover the replacement of the machinery with similar machinery. This can backfire for many equipment owners, especially when the equipment has been customized to their operation, such as an extruder that has been customized to their exact needs. An insurance adjustor may not understand the find differences between the types of equipment, dragging your claim out.

For that reason, many people will insure their equipment for replacement cost new. When a technical company in North Carolina had an office flood, they lost a significant portion of the equipment in their computer lab. The insurance company didn't understand that the equipment had been bought over time from a number of sources to ensure the company could work with the wide range of systems their clients were using. Because they had replacement cost insurance, they had to fight with the insurance company for many months to reach a settlement, as the insurance company didn't understand the current value of those machines to the business.

In another example, a company had a break in where several key pieces of equipment were stolen. Because they had replacement cost new coverage on the equipment, they were able to get compensation that allowed them to replace the stolen machinery with equivalent new machinery. This made it much easier for the shop to get back into working condition without too much lost production. Some of the machinery was much older, so finding the same equipment used would have been very difficult and very time consuming for the business. Because of the coverage they had on the equipment, they could find machinery that met a minimum set of specifications and be reimbursed for the purchase of that machinery by the insurance company. For example, an old bandsaw used in the shop provided resawing capability at 3 HP could have been replaced with a new resawing 3 HP bandsaw.

The difference between these two businesses is fairly clear. Both lost older machinery that was difficult to replace. However, one spent months trying to prove the value of the machinery in their business while the other merely had to shop for new equipment that met the same needs in the business. This had a huge impact on the productivity of the business and the amount of time the company's owners had to spend on growing the business versus chasing the insurance adjuster's latest numbers.

When you need to make an insurance claim or otherwise need to know the replacement cost new of your equipment, it's important to work with a certified machine appraiser who has experience in your industry. Why? It's important that they know why particular features and capabilities are vital to keeping your operation moving. They also have the knowledge of how to calculate this machine value accurately, which is important to your claim or need when you've had an equipment loss.

Let's face it - nobody gets excited about a dissolution. Whether it's your business, a partnership or a marriage, breaking up something that's worked well in the past can be a difficult and trying process. But instead of simply getting it over with, you may want to consider how to protect your interests before you lose out. Here's how to use an equipment appraisal to help document your assets in a way that will hold up well during negotiations and in legal circles.

What do you need to know to protect your interests in a dissolution?

We've all heard horror stories about how a dissolution can come out badly. Whether it's the businessman who lost the company Jaguar and computer lab while taking care of the employees or the divorced individual whose ex sold off all the equipment at a pittance, it's important to know what to do in these situations. Doing nothing will often leave you with nothing.

But what if you're not sure how much your assets are worth? As an example, an insulator in northern Minnesota was a handy sort. When he started his business, he had purchased a box van and installed a blower system for cellulose insulation. Because he had a keen eye for mechanical maintenance, the system was in excellent condition when, after many years in business and no takers to buy the company, he dissolved the business. The system had been fully depreciated many years before, yet it still retained excellent value because of the care it had received over the years.

On the books, the equipment had no value. In real life, it was worth quite a bit, especially when an enterprising sort from a few hundred miles away contacted him as the equipment sat in his empty warehouse. Years after the equipment had been purchased, the retired insulator ran into the young man who had purchased the machinery. "You know, I would have paid three times what you were asking for that equipment," the young man admitted.

This type of story is classic to any type of dissolution, but when two partners, either in business or marriage, dissolve a business, things can get ugly. If a divorce had been involved in the above case, the spouse could have come back and claimed the husband had intentionally gotten rid of the asset at a low price to avoid paying a fair share for the equipment during the dissolution.

When you have an equipment appraisal performed, you're able to provide documented evidence for the machinery's value. One party in the dissolution may claim equipment has a much higher or lower value to cause problems or get more out of the situation. The best way to resolve the issue is by having an independent third party determine the fair market value of the assets involved. This ensures that both parties get a fair shake out of the deal.

Dissolution is never fun, but it can be less painful if you take the time to protect your interests during the process. But don't expect your local equipment sales rep to provide you with a solid appraisal that will hold up in court! When you work with a certified equipment appraiser, you'll get a fair report of your equipment values that meets or exceeds legal requirements that won't be thrown out if things get ugly.

Anyone who is facing bankruptcy knows how agonizing the process is. You lose all control over your assets, being allowed to only retain a small portion of what you originally owned. You're asked to provide documentation of the value of material possessions, just to find that the documentation provided often doesn't meet the needs of the court system or the financial companies involved. Fortunately, there is one way you can document values to protect your interest in your assets - equipment valuation.

Facing Bankruptcy: How Equipment Appraisals Help Verify Asset Value

But why would an equipment appraisal hold up better than documentation from a common book of value, such as a Kelley Blue Book? General value guides will provide you with the information needed to value an asset in general terms, not specific ones. If you've taken exceptional care of your machinery, you don't want it lumped in with the same value provided to poorly kept equipment. You want it to be valued fairly, which is how equipment is valued during an appraisal. Another reason why certified equipment appraisal reports hold up better in court is the neutrality of the appraiser. Because the appraiser is a neutral third party, they're not going to gain anything by creating a false value. This, in turn, gives stronger credence to your report's validity.

Furthermore, when you work with a certified equipment appraiser, you gain the benefit of their knowledge. When an appraiser goes through the certification process, he or she has the opportunity to learn what methods are acceptable in which situations. The methodology used in valuing equipment for salvage or when waiting for the perfect buyer can vary greatly, and that's taken into account when the appraiser learns their trade during the certification process. For that reason, they already know what the proper valuation method is for the situation and can apply it properly in their valuation process.

Though liquidation value is the most commonly used approach to equipment valuation, it's not the only one that is allowed by the bankruptcy code. Other methodologies that are commonly applied include value in use, net realizable value, value in trade or any number of additional valuation methodologies may also be used, depending on your situation. Because a certified machinery appraiser is aware of the nuances of different appraisal approaches, they're in the best position to provide you with good advice as to the right methodology for your situation.

Once they've finished valuing your equipment, appraisers will document the method they used and any aspects of the machinery that impacted that value. This can include kits or expansions you added after the fact that still meet the manufacturer's specifications, the exceptional condition of your very well well maintained machinery or the high or low demand for your machinery in the industry or market as a whole. Because they've documented the entire process and have used proven methodologies in their calculations, their appraisal report will stand up well in court, with financial circles or any other organization involved in the process.

When you're facing a bankruptcy and want to ensure you're getting a fair shake on your equipment values, an equipment appraisal can go a long way towards securing your interests during the process. By taking the time to have an equipment valuation performed now, you can better protect yourself from being taken advantage of during this difficult time.

Over the past few years, the economy has been up, down and all over the place. If you've been able to keep your business in operation, it was probably due to some insights you gained while watching other businesses deal with the consequences of the recession and recovery. But what about your business? Do you know what your machinery is worth or if you can use it to leverage new growth for your company? One of the best ways to determine this is through a woodworking equipment appraisal. Here's how it helps:

Talk Shop: How a Woodworking Equipment Appraisal Helps You Get Ahead

As our economy continues climbing up out of the recession, we're seeing strong growth. People are investing in real estate again, and with that comes wood products to build those homes and the furnishings needed to make them unique. Many woodworking companies have begun to see an upswing in their sales once again and are starting to consider growing their businesses to meet that increased demand.

But at the same time, even as consumers are increasing their purchases, many businesses are being more cautious of growing too quickly. After the housing bubble crashed, many of them saw a strong downturn in sales as foreclosure rates began to climb. A large number of companies found they could no longer keep their doors open in these conditions and closed down, often liquidating their stock and machinery.

The remaining businesses are, understandably, a bit hesitant to embrace this new growth. These businesses want to take precautions rather than jump into new opportunities. The new restrictions on business loans that have come into effect during the recession make it more difficult to gain the financing needed to expand operations regardless. They're worried that if they begin to expand, equipment could fail or another calamity could cause them to lose what they've held so tightly to the past few years. What is the average woodworking shop owner expected to do to move a business forward in this business climate?

One option to consider is a woodworking equipment valuation. This process involves having a certified equipment appraiser take a good, hard look at your equipment, and then prepare a report to estimate the equipment's value. But more than the value is the information you gain. You'll receive an estimate of the expected useful lifespan of your machinery, allowing you to better prepare for potential replacements or repairs down the road. You'll know exactly what your equipment is worth, giving you solid numbers to take to the bank to secure financing to expand your business. You'll discover whether your equipment is in demand or whether there's still an excess on the market that you could take advantage of to expand your operation. With these details, you'll know exactly what you have, what it's worth and what you can do with it.

By taking the time to get a woodworking equipment appraisal performed on your machinery, you can gain some great insights into not only your equipment's value, but also its general condition and expected lifespan. This, in turn, can help you plan your expenses over the next few years, allowing you to then invest in other areas of your company when it's appropriate or purchase replacement machinery when it's needed. Make sure you work with a certified equipment appraiser who has experience in the woodworking industry to ensure the most accurate valuation possible.

When you're trying to secure a business loan, many financial institutions require bank financing collateral. One option you have available to secure the financing you need is by offering your equipment as collateral. However, how do you document the value of your equipment? The best way is through an equipment appraisal. Here are some details about how it works.

How an Equipment Appraisal Helps You Document Bank Financing Collateral

When you're using your equipment as collateral in a bank loan, it's important that both you and the bank agree on how much it's worth. If the bank undervalues your equipment, it may tie up more equipment than is fair in your loan. If you default on that loan, you may lose more machinery that would be reasonably required to cover the loan. If you overvalue your equipment, you may feel that the bank is taking advantage of the situation when they're being reasonable about the situation.

But how do you and the financing company reach an agreement on how much the equipment is worth? Do you use average resale values in the area? What if the industry in your region is depressed, causing equipment values to be driven down? Do you settle for low equipment values when you've maintained your equipment in excellent condition over the years? Do you hope the bank doesn't notice the poor condition of that one or two pieces of equipment or that they never need to call in the loan and realize the problem? An equipment appraisal helps you avoid this issue by preparing a solid report on the calculated value.

But when you have an appraisal report prepared by a certified equipment appraiser, you get much more than a report that satisfies everyone in regards to your equipment values. Is this round of financing just the first step in a larger expansion? What if your equipment fails before you get to that point? When should you replace the equipment as part of the entire process? An appraisal report will look at the condition of the equipment. Because an equipment appraiser spends significant time studying equipment on a regular basis, they have a good feel for how long the equipment is expected to last, providing you with an estimate of the estimated useful lifespan. This allows you to plan for equipment replacement as part of your larger expansion or upgrades.

What if you have a fire, vandalism or theft of your equipment? If the amount of collateral and the insurance settlement don't match up, you may find yourself having problems down the road. When you use a certified equipment appraiser, the report they provide is developed using standardized appraisal methodologies. These calculations have been tested in court, by insurance companies, by tax agencies and in financial circles, so they stand up well to heavy scrutiny. This means they'll work well for both securing the financing you need as well as providing reliable documentation of your equipment's value for other purposes.

When you get an equipment appraisal to document your bank financing collateral values, you can prove what your machinery is actually worth. However, to ensure that your appraisal is accepted at face value, you'll want to be sure that you use a certified equipment appraiser. Why? The process of becoming certified ensures that the appraiser is using standardized methodologies that will stand up well to scrutiny in legal, financial and insurance circles.

Maybe you've been avoiding opening that envelope or are still in denial about how much you seem to owe.

When it comes to property taxes, getting a bad appraisal can mean a lot of extra time spent dealing

with government bureaucracy. But what if you could get a tool that would provide positive proof of your equipment values and help ensure you come out on the right side of your property tax appeals? An equipment appraisal can provide you with the documentation you need to make it happen.

Why equipment appraisals are helpful when going through property tax appeals

When you get a bad property tax assessment, it can be very frustrating. Many people choose not to fight a bad assessment because they think the tax assessor knows more about their equipment values than they do. However, let's take a quick look at the tax assessor's job:

• As with virtually all government agencies, the tax assessor's office is under pressure to raise values. Why? Raising property value increases the funds available for the government budget, including the tax assessor's staff, salary, benefits and office needs.
• The assessor is required to assess a wide range of property, including homes, raw land, farms, manufactured homes, vehicles, boats, RVs, rental properties, business properties, tools, industrial equipment - you name it, a tax assessor has probably tried to value it at some point or another.
• Because of this broad approach to property values, it can be very easy for the assessor to make a mistake. Maybe they looked up the wrong trim level on your construction truck, found the wrong model number for your metal shop tools or thought that the injection equipment you own is five years old instead of fifteen. 

So how do you fight a bad tax appraisal? By providing proof of how much the equipment is actually worth. But before you head out to your local dealership, you'll want to bear in mind that they may also have a specific interest in estimating your equipment in one direction or another. If they want to sell you new machinery, they may tell you your existing machinery is worthless or drive up the value if they're trying to sell you a new model and want to make your trade look good.

The best option to look at when you're trying to prove your equipment values is by hiring an independent certified equipment appraiser. When you go this route, you can rest assured that the appraiser works with equipment like yours on a regular basis. They've been trained to use methodologies that hold up well to scrutiny in legal, financial, insurance and tax agency circles. The report they develop can stand up in an appeal, allowing you to pay a fair property tax on your equipment rather than an incorrect figure determined by your local tax assessment agency.

By including an equipment valuation as part of your property tax appeals process, you can ensure that you're providing solid documentation of what your machinery is actually worth rather than the tax assessor's opinion on the matter. If you do decide to use an equipment appraisal as part of your property tax appeal toolkit, remember to use a certified equipment appraiser to ensure your appraisal report will stand up to strong scrutiny in the process.

When you're trying to develop a solid asset risk management approach for your company, it can seem as though you're facing more numbers and possibilities than ever. But have you considered incorporating your equipment appraisals into your process? Machinery valuation provides you with a range of information on your assets to help you decide how to best protect them. Here's how:

How to Incorporate Equipment Appraisal in Asset Risk Management

Risk management, by definition, is restricting the amount of risk you're subjecting yourself to, either personally or professionally. Asset risk management is an extension of that. Though it's a somewhat involved process, it helps mitigate risk to your business' assets, including your equipment. 

To determine how much money you're risking with specific operations, it's important to start by knowing how much your equipment is worth. Another area of knowledge you should keep in mind is the equipment's expected useful remaining lifespan. As an example, let's look at the value of a few different machines:

• A new bulldozer that is financed and is costing the company a significant portion of their monthly income.
• An older extruding machine that has been fully depreciated, but is expected to continue working for many more years to come.
• An old metal lathe that still has some value but is nearing the end of its life cycle.

In these examples, you'd want to take very few risks with the bulldozer and moderate risks with the other two. Why would you worry about risks to a fully depreciated or worn out machine? Because the value they may still possess. It's much easier to guess at the value of the bulldozer, but the extruding machine may have value in its production role. The metal lathe may still have value if it's sold to pay off part of a piece of replacement machinery.

But with the two older machines, how do you determine value? This is one of the areas where equipment appraisal can be an extremely valuable tool to determining the equipment's exposure to risk and your overall asset portfolio. We've all seen equipment that has been fully depreciated using a standardized tax table, but continues to contribute to your business' profitability, whether it's an older spray foam truck, ancient table saw that just keeps going or an aging computer system that runs your ready mix plant.

When an equipment appraisal is performed by a certified appraiser, they use a range of methodologies that have been proven in legal, insurance, tax and financial industries. Because they deal with equipment on a daily basis, they're able to look at exactly what the equipment is, how widely it's used in other industries, the expected usable life span remaining and market conditions to calculate the exact equipment value. Though it may be more or less than what you see machinery sell for, the appraisal numbers will hold up because of the standardized calculations used by professional appraisers.

When you take the time to incorporate your equipment appraisal report into your asset risk management process, you'll quickly see results that help improve your company's overhead and profitability. Make sure the equipment appraiser you're working with is certified, to ensure you're getting a quality report that gives you a fair value for your assets, then use that information to build a better approach to risk management in your company.