Equipment Appraisal Blog | Understanding Machinery Appraisals

There are many reasons why business owners need to have a current appraisal completed for their machinery and equipment. Refinancing, mergers and acquisitions, tax and accounting regulations, trade-in or liquidation, new investors, and business disputes, to name a few. For each purpose, it is important to have a clear understanding of the appropriate types of values that will fit the particular project, as there will likely be a material difference between them.

Here are the most common types of value premises utilized in equipment appraisal, and their definitions as listed by the American Society of Appraisers:

Fair Market Value-Installed

An opinion, expressed in terms of money, at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts, considering market conditions for the asset being valued, independent of earnings generated by the business in which the property is or will be installed, as of a specific date.

Fair Market Value

An opinion expressed in terms of money, at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts, as of a specific date.

Orderly Liquidation Value

An opinion of the gross amount, expressed in terms of money, that typically could be realized from a liquidation sale, given a reasonable period of time to find a purchaser (or purchasers), with the seller being compelled to sell on an as-is, where-is basis, as of a specific date.

Forced Liquidation Value

An opinion of the gross amount, expressed in terms of money, that typically 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, as of a specific date.

Fair Market Value-Installed is often used when the equipment is part of a manufacturing or production facility where a lot of additional costs are associated with the purchase and installation. Fair Market Value is perhaps the most recognized term and best represents an arms-length transaction with no other considerations. Both Orderly and Forced Liquidation values are utilized by banks for financing purposes and by sellers who don’t have the ability or reputation to market their machinery in competition with typical dealers.

Before undertaking the valuation project you are working on, discuss these different premises of value with an experienced accredited appraiser who can assist with making the right choice.

If you are a business owner who has a lot of equipment operating every day from a production perspective, why not consider maxing out its working potential by tapping into its other benefits? Ownership has many perks, including the ability to turn hard-earned equity into cash. Gaining access to working capital will allow you to invest in other areas of your business, such as expanding personnel or buying more machinery to handle growth needs.

Although industrial machinery and heavy equipment (M&E) will depreciate over time, as opposed to land and buildings, they continue to hold significant value through the years, as long as they are well maintained. If you paid cash for them, or your initial loans have been satisfied, even if they are fully depreciated on your books, the actual market value of these assets can be determined and used as the basis for new debt that results in a significant cash infusion for your business.

When you begin working with a bank or other financial institution, take the time to develop a detailed listing of all your M&E, while providing access to your original purchase documentation, if required. The most important data to list out would be the general description year, make, model, and serial number (or VIN) for each item. Specifications such as production capacity, size, length, tonnage, or any important capabilities will be useful.

You and your preferred lending facility can work together to begin the process of developing estimate values for all the M&E while understanding the requirements of getting approved for your working capital loan. Keep in mind the bank is investing in you and your company, while taking a lien against the equipment as collateral, therefore, it will be important for them to become comfortable with the transaction. Most lenders will approve a certain percentage of Fair Market Value or look at more conservative liquidation values as the driver of the loan amount.

An important next step will be to engage with an experienced, accredited machinery and equipment appraiser, who can independently support the value of your assets. They will research the industry and develop opinions of value at various resale levels in the market while utilizing sources who are involved with the sale of new and used machinery. The lender may allow you to arrange for the appraisal directly or prefer to handle it themselves. In either situation, you will need to participate throughout the process, to ensure the appraiser has the optimal amount of information to best understand the history and current status of your M&E.

This type of unbiased report will independently verify a reasonable value for all your M&E, so you can get approved for that working capital loan your company needs to continue to grow and be successful today and for years to come.

As appraisers, we are at times asked to estimate orderly liquidation value on a "net" basis, which adds an anticipated cost or expense element to the conclusion. These requests most frequently come from banks and other financial institutions that are not in the business of buying and selling equipment. Their goal is to make a sound credit decision, based in part on a collateral review for a loan or lease, while including a more conservative worst-case scenario, where they would need to recover the equipment and sell it at a future point in time. This might occur in a customer default and repossession situation, bankruptcy, or an end-of-lease return scenario.

For a refresher, here is the formal definition of Orderly Liquidation Value from the American Society of Appraisers (ASA):

Orderly Liquidation Value is an opinion of the gross amount, expressed in terms of money, that typically could be realized from a liquidation sale, given a reasonable period of time to find a purchaser (or purchasers), with the seller being compelled to sell on an as-is, where-is basis, as of a specific date.

This estimate is considered a "gross" amount, meaning that it excludes any associated costs of sale that may occur during the period leading up to and associated with the transaction. This is where the "net" component comes into play.

Net Orderly Liquidation Value will consider common expenses associated with a sale. These could include recovery costs such as dismantling, rigging, and shipping; short-term storage; marketing/advertising; and broker fees/commissions. Depending on each specific scenario, these expenses will vary, and some may or may not be applicable. For instance, the size and type of equipment and whether you can keep the machinery at its present location during the marketing period, are large factors pertaining to the removal costs. Leasing companies will often require their customers to return the equipment at their expense during the end of lease stages, while alternatively, in bankruptcy, the bank may need to arrange and pay for this themselves.

To that end, the appraiser will subjectively make reasonable assumptions as to what the average costs may be, in a hypothetical situation, based on their experience. They may determine the focus should be on storage and selling costs, which are more consistent and likely to occur in any situation. Either way, estimating net orderly liquidation value first requires a determination of the gross value, and then applying a reasonable percentage or dollar reduction to that figure, in order to arrive at a final conclusion. Some of the third-party sources relied upon in the normal course of the appraisal can likely assist the appraiser with this calculation.

Complete independence is something most of us long for when it comes to living our lives. Although the definition in this context is somewhat different as compared to independence in a business transaction, the same level of importance applies to the term. Without independence in business, there exists the possibility that one or more parties involved may be making decisions or influencing those who make them in order to attain a desired result.

When value is part of the equation in a transaction, the stakes are even higher, and the risks involved are much greater. Value equals money and we all know how money can drive a lot of poor decisions.

With that idea in mind, it brings us to the concept of an independent and unbiased appraisal. Believe it or not, it was only around 35 years ago that federal and state regulators began mandating that all independent appraisers become certified, accredited, and/or licensed to become qualified. Before that time, many appraisers were not governed by these rules, which essentially means they had no official oversight. Thus, their independence, as well as the formal knowledge and understanding of how to complete an unbiased third-party valuation were not evident.

Since that time, appraisal foundations that were already in existence began to prosper, allowing for expanded oversight as well as the creation of more formal educational and experience requirements for appraisers. Formal standards of professional appraisal practice become more entrenched into the process that formally certifies and accredits valuation experts.

These changes were welcomed by banks, insurance companies, investors, and business owners, as there was now a high level of confidence that their transactions would include a fully independent assessment of value with the associated companies and their underlying assets, such as real estate, machinery & equipment, and intangibles.

The additional costs associated with these fully independent appraisals were outweighed by the added benefits, as the risk of any possible bias in their deals was significantly reduced.

In summary, there are still companies out there who claim to be appraisal experts but do not hold the required certifications or licenses needed to comply with all the regulations currently in place. Ensure that you don’t engage with any business or individual who is not accredited by a reputable appraisal association as they are not governed under these rules of independence.

There are a lot of reasons why companies and individuals need professional valuation reports as part of their ongoing dealings. Collaborative transactions, such as leasing and financing, donations and gifting, estate transfer, and mergers and acquisitions, will always be part of an appraiser’s practice. That being said, company and personal disputes will always be a primary driver of business for experienced valuation professionals.

Partnerships in companies once built to last somehow weaken and crumble when decisions can no longer be mutually agreed upon. Husbands and wives, who once enjoyed a happy relationship can no longer tolerate each other and have no interest in agreeing to negotiate a fair divorce settlement due to built-up resentment and anger.

Companies collaborating on an exciting joint venture suddenly become untrustworthy of the other’s intentions and can no longer work together as a team.

I could go on with general examples, however, the point is, that there will always be disputes arising between businesses and individuals because that’s just the way life is. People you thought you trusted show their other side and eventually betray you. Others decide they want to change their habits and opinions about important issues and begin to butt heads with the ones they previously were in sync with. It’s simply human nature. Some can adapt and resolve things between themselves, however, many cannot.

When individuals begin to disagree, a wall often builds up between the parties that is impossible to tear down. What was an issue that at first could easily be negotiated or compromised on, suddenly morphs into a problem that has no right answer. Common sense goes out the window and eventually, third parties are brought in to decide the fate of the situation.

This is where outside consultants, like appraisers and industry experts, with a high level of experience, have opportunities to work independently to assist in the dispute and play a part in the eventual settlement or ruling of the case.

If you find yourself in a situation like this, professionally or personally, first look to hire a good attorney. Then, when the time is right, discuss the case with experienced accredited consultants, such as an equipment or business appraiser, who can work with you to develop unbiased opinions about the assets involved with the case.