Equipment Appraisal Blog | Understanding Machinery Appraisals

Machinery & Equipment valuations rely in large part on available market data that can be researched and considered. This information can be in the form of recent sales, current listings, new equipment pricing, opinions on normal useful life, and average annual levels of market depreciation.

Two of the most common sources of this data are equipment dealers (vendors) involved in the retail sale of new and used machinery, and auction companies, who liquidate thousands of used machines each and every year through advertised public sales. How does an experienced appraiser review these sources, and consider them when valuing similar assets?

The answer to that question will likely vary somewhat depending on the appraiser you are working with, however, it is important to first understand the differences between equipment dealers and auctioneers, along with the levels of value each of these sources equate to.

New and Used Equipment Dealers

These market sources are usually experienced in specific equipment types and manufacturer/model lines and can provide valuable insights on the overall market, new and used equipment pricing, normal useful life, and how the assets typically decline in value over time. This data and their general opinions are viewed as direct Fair Market Value comparisons, however, they can also discuss how they purchase used equipment such as typical buy/sell margins from an Orderly Liquidation perspective.

It is important to keep in mind that, although equipment dealers are considered experts in their specific market areas, there may be some level of bias associated with their opinions. It is always a good idea to consider additional perspectives in order to gain a balanced conclusion of value.

Equipment Auctioneers

Auction companies are well recognized in many types of equipment markets, most notably in construction, earth moving, transportation, material handling, machine tools, and certain industrial manufacturing industries. Auctioneers provide a convenient, time-sensitive opportunity to liquidate assets under an organized public sale, and may even provide guaranteed buy-out options as an alternative for those unwilling to take on the risks associated with a “no-reserve” sale.

Because these sales are in the public arena, much of the data can be discovered quite easily through company websites, online databases, and other open sources. Auction sales data technically falls under the comparison to Forced Liquidation Value from an appraiser’s perspective, and actual realized sales can vary greatly depending on the type of equipment, buyer turnout, seasonality, and any number of other factors. Because of the potential inconsistency associated with this data, it is important to understand how best to consider it in conjunction with other sources of data to then conclude on a reasonable value.

In summary, new and used equipment dealers, along with auction companies, are considered two of the most important market sources of data for machinery & equipment appraisers. Making sense of this information and ultimately forming an opinion of value for the actual assets being appraised is the most critical step in any valuation effort. Engaging with an experienced, independent, accredited appraiser will provide you with confidence that the result will be credible and reliable.

There are times when used equipment dealers and resellers are asked to provide estimated values for the types of machinery they sell. Alternately, independent equipment appraisers have clients who wish to market their assets for sale, while asking the appraiser if they have experience liquidating the M&E they value. There are both similarities and differences between independent machinery & equipment appraisers and used equipment resellers, which creates a fine line between the two that should never be crossed.

When researching market values, equipment appraisers will contact used machinery dealers in the relevant industry, such as earthmoving, truck transportation, or parts manufacturing, to name a few. These vendors can provide insightful data to the appraiser, specific to the makes and model types they sell, which becomes one of several sources relied upon during the valuation analysis.

Equipment dealers often provide their clients with estimates of value prior to engaging in a resale effort, to assure them of their experience and to manage expectations for the eventual prices realized at sale. Both appraisers and resellers are continually crossing paths in the used equipment marketplace, even though their primary focus is quite different.

Here are some other distinctions to consider:

An accredited appraisal is an independent, unbiased opinion of value based on a blend of approaches and methodologies which, in part, consider the opinions of certain used equipment dealers. An experienced equipment appraiser will consider multiple sources before ultimately concluding on a value opinion.

This opinion is not a guarantee of a sale price outcome and the information they receive from equipment dealers will be subjectively weighed, depending on the rest of the information they gather. Equipment appraisers typically have a broad degree of experience in many distinct markets and industries, directly tied to their client’s businesses.

A used equipment dealer, on the other hand, will usually focus on a particular market, and more specifically, certain makes and models of machinery with which they have built their support and credibility over the years. These dealers will have a significant amount of expertise in these more refined areas but their primary goal is in the sale of equipment. While they understand value as a result of this experience, they are not considered independent or accredited appraisers. There may even be some level of bias in their opinions, given their ma objective is to sell, not appraise.

In summary, appraisers and used equipment resellers are quite different in their overall skill sets, however, the markets they work in often overlap. It’s prudent to understand the distinctions of each, so you can create the most beneficial team around you when it is time to consider buying, selling, or financing your machinery & equipment.

Many businesses rely on the use of heavy equipment to produce the products and services they sell, such as earthmoving, truck transportation, building construction, and all types of utilities, energy, and manufacturing companies.

In certain instances, the value of the machinery is the most significant component of the balance sheet, and can even be greater than the annual revenue of the business. If you own or are considering investing in a company with this type of profile, understanding the current market value of these underlying assets is as important as reviewing historic and forecasted financial statements.

To effectively measure the overall value of a business, one should consider breaking it down by the prominent asset types, both tangible and intangible, which translates to the need for an independent appraisal for each of these areas.

It would be careless to rely on the company's internal accounting records and policies to measure the value of their machinery & equipment, as they generally utilize accelerated depreciation rates to amortize the capitalized cost as quickly as possible.

If the company has a high content of expensive, long-lived machinery & equipment with an average age of over 5 years, there is every chance that the market value of these assets is much higher than the net book value recorded by their accountants. This variance can be monumental, even for small businesses with lesser sales volume.

For example, a company with $20,000,000 of capitalized machinery and equipment could effectively depreciate the entire cost over 5 years, realizing a net book value of $0 after 60 months. If these assets are used in manufacturing or construction, the likelihood is they will have a normal useful life range between 10-20 years, as long as they are well maintained.

Based on this generic scenario, it’s not unreasonable to estimate the market value of these assets to be $10,000,000 or higher, if the equipment is still relatively young, and in good operating condition. The appraised value of the company’s equipment would then be utilized as a part of the overall business valuation, instead of $0. One might say that is a difference worth determining!

Whether your targeted company is heavily reliant on tangible machinery equipment or not, it is always a prudent decision to obtain an updated Fair Market Value appraisal for these assets to effectively measure their true worth

A lot of people have probably heard the title phrase spoken informally when discussing the value of their truck, car, or piece of equipment. Possibly when they are seeking financing for the sale of used machinery or negotiating with a potential buyer or seller.

Is there any truth or logic behind this statement? That depends on if you are an equipment dealer, an appraiser, or a casual used machinery investor.

I heard a professional speaking to a group the other day about selling equipment in a very “down” market, where the industry was being perceived as potentially dead or dying. The equipment associated with this industry was being sold for pennies on the dollar during this period, by those in desperate need of turning the assets into cash. The machinery was fully operational and had years of useful life remaining.

On the flip side, is a 15-year-old truck-tractor with 1,000,000 miles worth 90% of what a brand new one would cost today? If you look at trade journals in the current marketplace, you will see these inflated asking prices as sellers try and take advantage of an unprecedented world economy we are in the midst of today.

From this appraiser’s perspective, these types of sales should be considered outliers to any reasonable, common sense comparable sales approach to valuing similar assets. If a business owner or investor is not willing to take a broader look at the market or industry they are working in, through impatience or necessity, then how they react in these situations cannot measure the true value of their underlying machinery.

Even the most cyclical, volatile markets will reveal a historic pattern over time that will likely continue over decades to come, regardless of what the doom and gloom prognosticators will try to tell you. Yes, there will be assets bought and sold at the peak and nadir of these cycles, however, any and all of these should be adjusted to truly measure the realistic value of machinery & equipment.

The sales comparable approach can sometimes lead an appraiser down a misleading path when used exclusively, and without consideration for ignoring sales that fall well outside of a long developed pattern, and in consideration of very unusual market behavior. As a complement to this data, take a realistic look at how these assets have generally depreciated in the marketplace in years past, based on their age, useful life, maintenance, and selling cycles in an adjusted, normalized market.

I am not saying these cyclical conditions should be completely ignored, but instead considerably tempered when distinguishing what an asset is truly worth vs. what someone is willing to pay for it in unique circumstances. How the appraiser subjectively weighs all of this information to formulate their opinions of value will vary, however, those who take the time to look at multiple perspectives will be able to bring sense to an otherwise unusual scenario.

As many are witnessing significant increases in residential and commercial real estate market prices and rental rates, due to the economic issues facing the country, the used machinery & equipment sales have experienced similar price adjustments. While appraisers and resellers can research and support these inflated prices based on actual sales, many banks and financial services companies are taking a more conservative approach when it comes to lending practices.

Still stinging from prior market “bubbles” which ultimately popped and led to significant defaults and write-offs in past decades, these equipment and real property borrowing sources are taking a more conservative approach when approving loans and investments using these assets as collateral.

Even before this most recent wave of used property value spikes, lenders would typically approve based on 60-80% of fair market value or 80-100% of an orderly type of liquidation value. This was considered normal business practice and for the most part, continues today. The biggest change we are seeing now is they are not taking every appraisal at face value with an understanding that current market conditions are in certain cases, unprecedented, with price increases at a dramatically high level.

Lending institutions are looking back at previous market levels for similar properties and equipment, and attempting to support a more reasonable value that will hold up over the long term. The biggest concern to owners and buyers looking to borrow or refinance is the lower level of funds approved, requiring a larger out-of-pocket cash down payment on the assets.

It is prudent to keep this information in mind as you look to acquire used machinery & equipment over the next year. While you may have no choice about the price you’re paying for these assets, the lending markets are becoming savvier in their approval practices, which will require more flexibility when settling up with sellers. If possible, try to keep an extra amount of cash on hand available to fill in the gaps.