Equipment Appraisal Blog | Understanding Machinery Appraisals

When it comes time to have a business appraised, whether it’s for a potential sale, purchase, re-financing, new partner investment, or even for internal planning and accounting, if the company owns personal property, machinery & equipment, it makes sense to consider valuing these assets as well.

A business appraisal will involve a review of the company’s financial statements, which include these tangible assets listed at some depreciated cost basis, and may not accurately reflect current market value. Especially if the property was purchased years ago and subject to a short-term, accelerated form of depreciation. This will lead to a likelihood that the net book value on the account ledgers for the personal property and equipment will be at or close to $0.

If the company being appraised will, in part, be affected by re-establishing the current value of the personal property and equipment, then engaging in a distinct appraisal for these assets should accompany the business valuation.

As an example, if the business appraiser is valuing a machine shop and, while reviewing the financial statements, finds a net book value of $100,000 in depreciated machinery & equipment, this is the figure he will use for the overall asset valuation analysis. If, however, an equipment appraisal is completed in conjunction with the valuation effort, and the current market value for these same assets is estimated at $500,000, then this figure will override the internal depreciated number, realizing a significant increase in overall tangible asset value.

This adjustment to the company’s books will truly reflect the overall value of the business and can be used for any of the purposes discussed earlier. It will also provide peace of mind to all parties involved in the larger transaction being reviewed, knowing that an independent third-party appraiser has updated the key components of the business that drive overall value.

There are a handful of appraisers in the marketplace who can value both the machinery & equipment and overall business for their clients. Many of them are larger, conglomerate-type companies who may overcharge you. Equipment Appraisal Services and our sister company, Business Valuation Specialists, can provide this capability to you at an affordable cost while delivering the highest level of service available. Contact us in the comments section below, at equipmentappraisal.com, or businessvaluations.net to see what we can do for you and your business.

For machinery & equipment (M&E) appraisers, there are basically two approaches to value that are ultimately relied upon when completing valuations: the Sales Comparison Approach and the Cost Approach.

Here is a brief description of each:

The Sales Comparison Approach

The Sales Comparison Approach indicates value by analyzing recent sales (or offering prices) of properties that are similar (i.e., comparable) to the subject property. If the comparable data is not identical to the properties being appraised, the selling prices of the comparable items are adjusted to equate them to the characteristics of the properties being appraised.

The reliability of this technique is dependent upon the degree of comparability of each property with the property under appraisal; the time of the sale; the verification of the sale data; and the absence of unusual conditions affecting the sale. This approach focuses on the actions of actual buyers and sellers.

The Cost Approach

The logic behind the Cost Approach is the Principle of Substitution: a prudent buyer will not pay more for a property than the cost of acquiring a substitute property of an equivalent utility.

Using the Cost Approach, the appraiser starts with the current Replacement Cost New of the property being appraised and then deducts for the loss in value caused by physical deterioration, functional obsolescence, and economic obsolescence.

The third approach to value, the Income Approach, is rarely used for M&E appraisals, and I will leave that discussion for another time. The Sales Comparison Approach is also commonly referred to as the “Market Approach”, however, don’t let that trick you into thinking the only time you rely on market data is under this approach. To effectively use the Cost Approach, an appraiser should rely on the marketplace as well, to estimate the variables involved with this approach, including replacement cost new, useful life, depreciation, and salvage value.

Perspective From Both Approaches

Every appraiser has their own process as to how they ultimately utilize the tools available to determine value. It is ultimately an independent, unbiased, subjective opinion, based on the gathering of a reasonable amount of data, which is developed during a research and analysis process.

To that end, from my experience, I have found it beneficial to take components from both approaches, established directly from the marketplace, and create a dual perspective that ultimately forms credibility checks to both, and provides the appraiser with supportable conclusions. Given that comparable sales data can tend to be inconsistent from machine to machine, even from the same sources, this blended approach can create a way to make sense of all the data points and better understand how particular assets should depreciate in the marketplace under normal maintenance and wear and tear guidelines. The use of the Cost Approach in any other way, such as using straight-line depreciation to cover all forms, or trying to develop credible levels of replacement cost and obsolescence by using broad industry data, is simply not reliable or supportable.

In summary, regardless of how much weight an equipment appraiser places on either of these two approaches during a valuation analysis, they should assure their clients that the data collected comes directly from the marketplace. The independent sources that an accredited M&E appraiser can find for virtually any type of asset are out there and available, they just need to do a bit of digging to find them

As a business, your investment in your equipment is a large part of your overall assets. Knowing how long that equipment will continue to operate is an important piece of information to help you plan your company's future expenditures. But the remaining useful life can be hard to determine. Fortunately, there's a way to get around the difficulty in determining this expected lifespan. Machine appraisers spend all day looking at and appraising equipment, so they not only have experience in how to calculate the estimated remaining lifespan but also know how to recognize signs that may extend or shorten machine lifespan. Here's a quick look at the overall process and what aspects may impact your equipment's estimated remaining life.

How does a machine appraiser determine remaining useful life?

Machines, like people, can age at different rates. Imagine a two-pack-a-day smoker with bad genetics who has done heavy construction and drinks a six pack every evening, before taking a ride down into some scary parts of town while never going to the doctor. If this individual made it past 50, it would be a miracle. The health guru with perfect genetics, a stress-free life and a love for fitness who regularly has health screenings may expect to live past the century mark at this point. Much like people who do or don't take care of themselves, machines can fail at different rates.

One area that can quickly impact machine lifespan is the environment in which it is used. Much like the smoker, a piece of equipment that is kept in a damp, dirty environment with extreme temperatures will tend to degrade much faster than one kept in a clean, dry environment with regulated temperatures. The bad genetics would represent the expected overall lifespan of a specific model of equipment, such as a model known for issues that will not last as long as similar models because of poor manufacturing, materials or mechanical problems. At the same time, the heavy construction background represents hard use of the machine. Equipment that has been used at the very top of its range of specifications, received hard use in a short period of time or otherwise abused will have a much shorter lifespan than may otherwise be expected.

When an equipment appraiser looks at a piece of machinery, there are a number of clues they can take into account. In addition to already knowing a rough range of estimated overall lifespan, the appraiser can look at the exterior for signs of abuse, including dents, bends or evidence of poorly-made repairs to determine any excessive use the equipment may have received. A look at internal components may reveal failing mechanisms that could cause a serious failure down the road. Checking out the environment may lead to details about whether a fresh coat of paint may stop corrosion or if the rust may cause a premature failure.

The process of estimating remaining useful life can be a daunting task, but with an equipment appraiser taking over the process, you'll quickly have the information you need for your business planning purposes. Be sure to check whether your equipment appraiser is certified, as the methodologies used by certified equipment appraisers have stood up to strong scrutiny in a wide range of situations. This means the remaining equipment lifespan they estimate for you is much more likely to be a good tool for your business planning needs.

When you work in health care, it can seem as though every week brings a new piece of equipment to your attention. Whether it's a new diagnostic tool, new therapy machine or something specific to your specialty, there's one thing that is almost always true: it's too expensive. But what if you could leverage the value of your older medical equipment against that total? As new technology is adopted, there's a limited window of opportunity between the time that the new equipment hits the market and the older technology becomes obsolete. How do you know when it's the perfect time to act and get the most from your older equipment while not paying the inflated cost of the latest and greatest? Medical equipment appraisal.

Update your practice with a medical equipment appraisal

When you talk to a medical equipment company, they may tell you that your equipment isn't worth much and that you need to upgrade immediately to take advantage of new technology. However, look at it from their point of view. They want to sell you new equipment and move your old equipment as quickly as possible. Without even looking that closely at what features your equipment may have or kits that have been added to the system, they're going to give you a low ball price on your old equipment to get it out of the way for the new equipment they want to sell you.

An independent machine appraisal specialist, on the other hand, has nothing to gain from the sale or purchase of equipment in your business. They don't have a commission riding on the final price. Their job is to take a good hard look at your equipment and use a solid methodology to determine your equipment values. They may even know about alternative markets where you could get better money for your equipment than the local businesses, such as going through the export process to sell older equipment to overseas buyers who will pay a premium to get good used equipment that's actually from this century.

There's one other thing that a professional machine appraiser will look at as well. Where is the equipment located? Though it's pretty easy for someone to say what the machine is worth, they may not take into consideration that moving it will require taking out that new partition wall because the other doorways in the practice are too small for it to pass through. In any situation, a qualified appraiser will mention these potential issues.

As you can see, getting a quality medical equipment appraisal helps ensure that you can get the most out of your older machinery while ensuring you can afford the cost to adopt new technology in your office. But before you go with just anyone, make sure the equipment appraiser is certified. Why? Certified equipment appraisers have been trained in standardized methodologies that will hold up to strong scrutiny, whether it's with an insurance company, financial firm or even in a court of law.

When you're in the restaurant business, change is inevitable. You'll need to change suppliers, update your menu and constantly train staff. But what about the big changes, when you're considering expanding your location or offerings, adding a new location or changing the direction and focus of your restaurant entirely? Though a restaurant equipment appraisal may seem like a strange way to manage the risk of these potential opportunities, it can actually be a great benefit - heres how:

How a restaurant equipment appraisal helps you manage risk in new ventures

• Know your bottom line. One of the first places where restaurant machine appraisal comes into play is to help you determine the risk in taking a new venture or opportunity. A bit part of the decision is comparing your assets against your liabilities. But if your assets aren't accurately valued, you don't really know what that figure should be. Are your assets undervalued because they have additional features or are exceptionally well maintained? Are they overvalued because they need repairs or have seen excessive wear and tear? Having restaurant equipment appraisals completed helps you know exactly what your equipment, and by extension your asset accounts, are actually worth. This helps you make decisions to change your restaurant, expand it or open new locations based on accurate information and an accurate view of the risks involved.
• Leverage your assets to help with business changes. Because a well-qualified and certified appraiser will have a particular methodology that he or she follows to determine the accurate value of your restaurant equipment, it provides legal documentation of those values. When you approach your financial institution about getting financing for your business' planned changes, having an equipment appraisal from a certified appraiser ensures them that you've done your homework and are taking the expansion - and their investment in it - seriously.
• Consider whether the equipment will be an asset in a different direction. If you're making a large change in the direction or theme of your restaurant, some of the equipment will still be helpful while others may be put to better use somewhere else, allowing you to raise more capital to invest in your new venture. If you've run a buffet in the past and are changing over to a more traditional style of restaurant, steam tables and similar fixtures can be sold to invest in new furnishings and similar investments that will help you make the most of your new opportunity.
• Get a better idea of how long the equipment will function effectively and efficiently. Because equipment valuation specialists look at restaurant equipment all the time, they have a good idea of how many more years you'll get out of the mixer you've purchased for your bakery expansion on your country cooking restaurant or the industrial-sized gas wok in your new Mongolian BBQ establishment. This also helps you decide which equipment to keep for your new venture and which to replace in the interest of keeping things running smoothly.

By having a restaurant equipment appraisal performed on your restaurant machinery, you can ensure that you know exactly where you stand and have the proof to back up your new venture.