Equipment Appraisal Blog | Understanding Machinery Appraisals

Whether you’re a business owner, investor, bank, leasing company, partner, key employee, insurance provider, or just someone buying, selling, or donating equipment, there are several instances where understanding value will greatly assist you. Quite often, however, the fees associated with business and equipment appraisals get in the way of making a sound decision; however, when compared with the benefits you gain, you should not hesitate to pull the trigger.

Generally speaking, appraisal services are designed to assist in facilitating the closing of a transaction, whether business or personal, and are also utilized in the settlement of disputes. These can come in many forms:

Bank Financing and Leasing

The traditional process of working with banks, leasing companies, and similar financial institutions will require a review of underlying assets in order to collateralize and secure a loan or lease. They also become critical in the event of a default or end-of-lease buyout. Whether you’re the lender or borrower, it’s a “no-brainer” to obtain an independent, qualified valuation of the business and related collateral.

Private Equity Investment

A secondary source of capital for small businesses or in an outright acquisition, private investment will allow companies to expand their resources, promote growth, or transfer ownership. Both the buy and sell sides of these transactions need to support their opinions of value with an accredited appraisal.

Buying and Selling

In any outright purchase or sale of virtually anything valuable, those involved will want to have a formal appraisal report on hand to confirm the fairness of the deal. Successful negotiations are the cornerstone of good business practice. A third-party valuation will assist in the process.

Settling a Partner Buyout or a Divorce

Partners in life and in business may eventually fall out of favor with one another, and separation becomes inevitable. Negotiating a fair settlement will be made clearer with an updated valuation.

Reporting Requirements

Whether it’s for accounting, tax, or insurance purposes, an unbiased appraisal will not only come in handy but may be a requirement of the underlying authorities reviewing the transactions. Many of these relate to independent valuation and review.

In summary, once you determine the importance of valuation and how it will facilitate the process of managing and closing any transaction, don’t hesitate to find the most qualified, experienced appraisers and make the investment. It will not only assist you today but will come in handy down the road when a similar situation arises.

Machinery & Equipment valuation relies in part on understanding the new and used trade markets and developing an analysis that reasonably reflects what the subject assets being appraised would be worth in those markets. Before you even start to investigate this research, an early component of an M&E appraisal work effort involves the receipt of detailed data from the client that clearly identifies the machinery, including specifications and purchase history.

The additional perspective an appraiser receives by obtaining this data at the beginning of the engagement has many benefits. It saves the appraiser time by having them recreate this information themselves and allows them to price the valuation more competitively, given the time saved by performing this task themselves. Asset history provides specifics about the machinery being valued, which builds the foundation for the appraisal.

Every piece of equipment is different in its own way. The specifications, hours, mileage, usage factors, as well as upgrades and refurbishments completed at certain points in time, will all factor into the ultimate conclusion of value.

Knowing the original purchase price of the machinery, even if it was several years ago, will assist in reasonably verifying that the replacement cost estimates you determine are accurate. Appraisers cannot blindly assume all the independent market information they uncover is 100% bulletproof, as sources can be limited or inconsistent across multiple market sellers.

This is perhaps the biggest challenge in the equipment industry. Unlike business valuation, where databases and historical financial data are available and consistent in form, and real estate, where published comparable property resale data is more definitive, equipment market data can be erratic and full of gaps.

You will commonly see the same makes and models of equipment, with virtually identical specifications and usage, listed and selling for vastly different prices. The auction marketplace, which reflects billions of dollars of used equipment sales annually, experiences varying levels of demand, leading to less reliable data with a wide range of price points.

For every valuation assignment, consider performing a direct and/or indirect cost approach, which can be developed from the historical data provided by the client, as well as research into new equipment pricing in the market. This perspective will provide additional support and complement the market approach, ultimately determining a reasonable and supportable value for the equipment.

If you own a business looking to dispose of excess used equipment, or personally own property you no longer need, your first thought may be to resell it in the open market. This can be a difficult process with no guarantee of the price you will receive. Another effective option to consider is donating the assets to a local non-profit, such as a public school/university, hospital, research institute, charity, museum, or other tax-exempt organization.

Research options locally, or contact your high school and university to see if they would be interested in acquiring the used equipment for their educational programs, or refer you to a facility they know would be interested.

The benefits of this type of disposition are many. You have the obvious tax deduction, which offsets your income. You may also be accruing goodwill by helping the organization you’re donating to, as well as the individuals they support, by providing useful equipment they might not otherwise be able to afford. Scientific, medical, and technical research and educational institutions need resources to maintain and grow their foundations.

Before making the donation, make sure you check that the equipment is in good working order and clean it if necessary. Then create an itemized list of what you will be providing to the non-profit organization. This list will be very useful when filing your taxes and for valuing purposes.

If you are fairly certain the overall value of your donated machinery will exceed $5,000, you will need to obtain an appraisal to support the higher claim. The advantage of a donation appraisal is that the price level will be measured at fair market value, which is higher than any trade-in or liquidation price you would receive from potential buyers if you tried to sell on your own.

Look to engage with an experienced, accredited appraiser who is familiar with the type of assets you are donating. Equipment donation valuations are common, and the appraiser can provide the support needed to ensure you receive a reasonable and supportable value assessment.

Once the appraisal report is delivered, you will need to complete IRS Form 8283 for non-cash donations and have the appraiser review and attest to the reported value. You can submit this as part of your overall tax return.

Donations can also be made for unused inventory, such as spare parts and tools. Companies that produce excess finished goods can also donate these items using the same process. Equipment appraisers with experience in valuing inventory can work with you on these types of donations as well. In summary, before you decide to resell your excess used machinery, consider a donation as a more effective alternative.

When it comes to independent valuation work, an objective opinion should have a certain degree of subjective common sense in an appraiser’s analysis and conclusions. Without it, they might be shortsighted, taking everything they see at face value without relying on their own experience to properly sift through the compilation of data and determine a realistic conclusion. This is especially true with machinery and equipment appraisers, as multiple sources about the same topic can be considered and relied upon, the sum of which will likely show a broad range of information.

There is no question that experienced appraisers with certifications and accreditations must show no bias or undue influence toward their clients and the overall scope of work. This is the fundamental foundation of the valuation industry and cannot be argued against.

That being said, an appraisal is an estimated opinion of value, and opinions are inherently subjective, regardless of the number of sources and documented information on which it is based. This is where the appraiser's experience becomes critical to the reliability of the value assessment.

The source material an appraiser researches, reviews, and relies upon will likely have gaps, flaws, inconsistencies, and broad ranges tied to the data, which they must make sense of and determine how best to correlate the information into a final conclusion.

Depending on the market activity of any given asset, these data sources might be abundant, very limited, or somewhere in between. In every instance, each piece of information should be considered and weighed.

The appraiser's job is to identify consistent patterns and potential outliers to arrive at a reliable opinion. They should ask themselves questions such as: 1) Are the available listings consistent and reasonable? 2) Are the database sources full of holes from a lack of prior sales data? 3) Are the opinions from third parties biased based on who is providing them? 4) Do industry trends focus on the specific equipment being valued?

Coming up with a logical, thoughtful conclusion of value is the ultimate goal of an appraisal expert. Going through this process is what separates established valuation experts from the rest of the pack. As a result, a degree of subjectivity will always be a component of an appraisal, regardless of the number of sources you rely upon. Consistently implementing this process across every valuation engagement is one of the most essential roles of a professional appraiser.

As a business owner, investor, or finance/leasing company, there are certain things that need to be accomplished every year in order to continue along the path of future growth and success. Each decision may require input from key employees and independent advisory collaboration to ensure the most informed opinions.

When valuation professionals are involved, they need to understand this broader transactional perspective and their specific role in it, so they can suggest the best scope of work to help move their client’s deals forward. When clients are considering engaging with a professional appraiser, ensure that their experience is commensurate with the ability to work within this broader environment.

Some of the key variables that valuation experts should discuss with their clients within the overall framework are:

The Effective Date of the Valuation: The written report date and the effective date are often different, depending on the circumstances.

The Appropriate Value Premises: There are potentially multiple distinct market levels of value to consider in an appraisal. Determine what the most appropriate of these is within the context of the transaction or internal decision-making process.

Desktop vs. On-site Approach: Which of these options is the right choice given the underlying requirements of the deal and the quality of the data already available?

Consulting Opinions: Appraisers can also provide comments on topics such as future (residual) value and remaining useful life. They may be able to consult with their clients on how the valuation work might impact the overall transaction or internal processes. Depending on the valuation professional's overall experience and background, the client might consider discussing more of the specifics of the ongoing situation to determine whether additional consulting insight is merited.

As the potential client, ensure that the valuation firm has the requisite experience needed to feel secure that their analysis and narrative report will be thorough. Less experienced appraisers can support the effort; however, avoid firms that use their junior staff to complete the research and legwork while the experienced senior manager takes only a minor review role.

Accomplishing both short-term and long-term business goals is one of the most important factors that will steer a company to its future success. Relying on the right team, including valuation experts, will ensure the best odds of realizing that success.