Equipment Appraisal Blog | Understanding Machinery Appraisals

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If you thought the end of the year might bring some normalization to the used vehicle and heavy equipment markets, think again. With two months to go until 2023, there has been little, if any, downward movement in price levels, and best-case predictions are that prices will level off to around 20-25% higher than in 2019-2020.

Even the most optimistic analysis for potential buyers will amount to the fact that normal depreciated loss in value seen year to year for used machinery has not only been wiped out but, has been substantially reversed in the form of appreciation. What is likely to happen is at least another year of inflated values for used equipment until the supply chain issues have been significantly adjusted to allow for new vehicle and equipment manufacturing levels to meet demand again. The effect of this is vastly higher than any typical annual cost of living increase which shakes up every measuring stick used in the past several decades.

This type of market activity has also thrown the appraisal industry for a loop. Recent vintage assets (1-5 years old) can commonly be seen priced where new machinery should be, and even above this level at times. Older equipment (10-20 years) levels are now where you’re used to seeing them for slightly used machines. The longer these trends continue, the more weight appraisers will need to place on this effect.

Common pricing databases are now reflecting these patterns as well. What was once thought to be difficult to support from a longer-term trend perspective is now becoming a permanent adjustment in the market that will likely not reverse even when things start to normalize. Insurance companies will need to consider this if they haven’t already when estimating depreciated replacement cost settlements for personal property. Accountants may see an opportunity to recapitalize their company’s asset values based on the support of the data being presented.

Similar to what has recently occurred with inflation on things like gas and food costs, the price will peak so greatly that when it eventually settles, it will probably remain significantly higher than it was a few years ago. Don’t fool yourself into thinking that the longer-term effects of inflation aren’t a big deal, and that pricing will go back to where it was “back then”. Based on everything we’ve seen in 2022, along with recent predictions from the experts in the field, we should get used to the elevated pricing in the used vehicle and equipment markets.

If you believe an updated valuation of your company’s assets might make sense given these changes in the market, ensure you engage with an accredited, certified appraiser to best understand the effects this may have on your long-term goals.

Most business owners have an opinion of what their assets are worth based on their day-to-day experience operating them. They probably remember what they paid for even their oldest vehicles and equipment while understanding the amount of maintenance and extra work that has been invested in them over the years.

If this holds true for you and your company, then why would there be a need to conduct an appraisal using an outside firm that doesn’t have this first-hand knowledge? What could they possibly know that you don’t?

The short answer is that a third-party appraisal is required from time to time. Whether it is your accountant, attorney, bank, investment partner, insurance agent, or a potential buyer, any of these employees or external relationships may recommend you obtain a valuation of the tangible assets for your business.

The advantages to obtaining an appraisal are not just limited to the requirement involved. For example, if your bank advises that the Small Business Administration (SBA) will be involved in your company’s refinancing plans, it will likely be a requirement to obtain an independent third-party appraisal of the assets, or collateral, supporting the new loan. Not only will the formal valuation report satisfy this need, but it will also provide you with an impartial, unbiased opinion of value for all your machinery, equipment, vehicles, and FF&E owned by the company. The report could be used for other internal needs as well, such as supporting a higher value for your overall business or updating property insurance coverage.

Any time you have an experienced, professional, third-party firm assist in validating the true value of your equipment, or any other facet of the business, the results will be viewed as realistic and objective, which brings a high level of credibility to you and your associates. It is always prudent to remove the inherent subjectiveness that might be weighing in with your own opinions.

As with any major life decision being considered, it is usually a good idea to obtain opinions from those who may be able to view things from a different perspective before the ultimate decision is made. Once trust is established with these partners, you will be able to rely on them to help you along the way.

If you’re like many small business owners who run a lot of heavy equipment every day, you try to keep it operational for as long as possible to avoid purchasing new replacement machinery. Given the added capital investment, as well as today’s supply chain woes, which lead to long delivery delays and increased pricing with new equipment, this is a wise course of action. There may come a point, however, when the decision to retire older machines becomes inevitable.

Every successful company that operates expensive machinery employs experienced, talented personnel who manage day-to-day facility operations. This includes running and maintaining the equipment as well as replacing components, and even rebuilding the equipment when necessary. If done effectively, this leads to an extended economic life for your assets, well beyond their initial estimates.

That is why you will often see equipment and heavy vehicles still operating in the field 20, 30, or even 40+ years since the day they were first built. This can instill a sense of pride as it relates to the longevity of owned machinery, however, companies should consider reviewing annual maintenance and operating costs vs. the potential longer-term impact of buying new replacement assets.

Things to consider in this analysis:

Look back over a 5-10 year period and calculate the average annual cost of operating your machinery. Include factors such as monthly maintenance, refurbishments, component replacements, downtime effects, job completion delays, and anything else that relates to daily operations and project costs.

Weigh these average costs against the investment in replacement machinery, while estimating annual costs to service new debt, reduced operating and maintenance costs, more efficient run time, and project capabilities. The latest technologies developed for new machinery can be a double-edged sword, with a lot of computer-controlled components you need to consider, as well as training personnel to effectively operate them.

At some point, it will become clear when it’s time to make the call and upgrade your fleet of equipment. It’s a difficult decision that is based in part on common sense, practicality, competition, and even emotions. Moving into the next generation of equipment is always a big decision, however, don’t put it off too long before it begins to affect your bottom line.