Equipment Appraisal Blog | Understanding Machinery Appraisals

When an appraiser estimates value, they must do so under an assumed premise that relates to the type of transaction being undertaken and the potential outcomes of an impending sale. Premise of value is one of the most critical components of an equipment appraisal given the different assumptions each premise represents and their material differences.

Each value premise must be defined in the appraisal and can reasonably be tied to a typical market transaction, such as a user-to-user sale or an auction liquidation. The most commonly referred to premise is Fair Market Value, which is utilized in many standard business agreements when the need arises to assess value for any purpose. The American Society of Appraisers defines Fair Market Value as follows:

Fair Market Value is 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.

There are variations to the Fair Market Value premise, including assumptions for installation and continued use, which typically drive higher levels of value given the additional considerations involved. The important factor to understand with Fair Market Value is that it represents the most equitable transaction for both parties, where neither the buyer nor seller have an advantage. Each party is equally willing to transact and knowledgeable of all the facts.

In the open resale marketplace, this may not always be the case, therefore, other premises of value are considered, including Orderly and Forced Liquidation. These definitions add the factor of compulsion on behalf of the seller, with more limited time to sell a key factor. These premises are appropriate to consider with an inexperienced owner or if a company goes out of business. There may be a reduced level of control over the sale by utilizing a third party, such as an auctioneer, to liquidate the assets. This is the foundation for Forced Liquidation Value.

Liquidation premises of value are commonly reviewed by banks and other lenders who want to consider the possibility of having to step in and resell the equipment if their borrower defaults and they end up taking possession of the assets. They are not in the business of buying and selling machinery and may involve an equipment dealer or auction company to manage the logistics of a resale effort.

These liquidation premises will obviously drive a lower estimated value for the machinery & equipment. How much lower will depend on the type of equipment and the state of the resale market, among other factors. Consult with an appraiser to better understand these differences.

As a business owner, when you determine it is time to sell off older equipment and upgrade to more recent or even brand-new makes and models, you will need to enter the market and begin to research options to effectively handle the transition. It’s only logical that you will seek to understand both new and used machinery pricing based on what is available from dealer networks and other sellers. Obtaining an independent appraisal of your existing fleet will be very helpful in validating and comparing your thoughts and findings, ensuring your ability to make a fully informed decision.

As part of an equipment appraiser’s analysis, they will research and source comparable market information, while also analyzing available databases and their experience valuing similar assets in the past. Used equipment asking prices and recent sales are important to review during this process, however, it is just as important to understand the new machinery market and gain this additional perspective.

Replacement Cost New is the formal term for what brand new equipment should sell for in the current market, or as of the effective date of valuation. Machinery and Equipment appraisers can utilize this component of their research in several ways when comparing it to the other market data they develop. It is a principal element of the Cost Approach to value.

An appraiser should first determine a reasonable pattern or relationship between the new and used pricing while taking into account the equipment’s age, useful life, and commonality in the resale market. For instance, how does new pricing compare to what was originally paid for the machinery being appraised? What are typical levels of market depreciation on a year-to-year basis from newly purchased to the end of the equipment’s initial life cycle?

A seasoned professional will look to estimate new replacement cost for machinery based on available market information from the manufacturer or representative vendors. Utilizing industry trends from broad indexes and applying them to historic pricing is not nearly as reliable as direct market data and should only be used as a last resort. The same goes for developing estimates of depreciation and useful life. An experienced appraiser should never assume straight-line accounting-type depreciation is applicable in the valuation industry.

Even if an appraiser has a multitude of used comparable sales information to consider, they should not neglect to understand replacement cost new, as well as the other components of the cost approach. This complimentary style of appraisal is more reliable and supportable than relying solely on a single approach.

When you decide it is time to replace your equipment and engage an appraiser to assist in the overall effort, ask about these types of methodologies and approaches to ensure you are working with the most competent professionals.