Equipment Appraisal Blog | Understanding Machinery Appraisals

Elements of Equipment Appraisals: Should the Income Approach Apply?

Posted by Equipment Appraisal Services on Mon, Aug 21, 2023 @ 07:30 AM

Applying Income Approach to M&E Equipment Appraisal

Even though other professional appraisers may disagree with me on this topic, I find it is relevant to raise the issue of whether the income approach should apply or even be a consideration when valuing most machinery and equipment (M&E). In my 40 years of working in the M&E asset management and valuation markets, involving machinery across virtually every known industry, I can count on one hand how many times I have even attempted to assess and place weight on this approach. The same goes for the number of times I have been asked by a client even to consider it.

In layman's terms, the Income Approach estimates the current value of the future economic benefits of owning a particular piece of equipment. Similar to using this approach to estimate the value of a complete business or real property (land, buildings, and related assets), which is relevant in many cases, it requires the ability to clearly separate and directly apply revenue and expenses to M&E.

A scenario where this might be possible is a business that owns a rental fleet of equipment such as trucks, trailers, or heavy machinery. Both short- and long-term rental history could be considered and potentially applied to estimate the value of this type of activity. There are concerns, however, as to the validity and reliance of the assessment.

First, it is common practice in the equipment rental industry to apply discounts to the eventual purchase price of these assets based on past rentals when their clients eventually want to buy them outright. Even with large assets such as aircraft, this is not unusual. The result is that a significant portion of rental income lessens the real market value of the equipment, causing it to get tangled up with the other approaches to value.

Second, assuming you can estimate value under the Income Approach, given the restrictions and requirements, how do you weigh the result in the context of the other approaches, namely Cost and Sales Comparison (Market)?

You cannot completely ignore the other two approaches, as they should be considered and applied to some degree in every equipment appraisal regardless of the purpose, especially if the income approach estimate is materially different from that of the cost and market methodologies. I have never completed an M&E valuation without placing weight on each of these two methods.

In summary, these are just two of several issues that create concerns about the appropriateness of utilizing the income approach to assess M&E value. Contact an accredited professional appraiser to learn more on the topic.

Tags: Equipment Appraisal, equipment appraisers, Income Approach, M&E

Elements of Equipment Appraisals: Historical Data

Posted by Equipment Appraisal Services on Mon, Aug 07, 2023 @ 07:30 AM

Historical Data in Machinery and Equipment Appraisals

Machinery & Equipment (M&E) valuation relies in large part on understanding the new and used trade markets and developing an analysis that reasonably reflects what the particular assets being appraised would be worth in those markets. Another important component of an M&E appraisal is looking internally at the business that is or was directly involved with the most recent purchase and operation history of the equipment to understand the facts behind this.

The additional perspective an appraiser receives by learning this history is critical to making potential adjustments to the market information they research. This history provides in-depth specifics for the machinery actually being valued that can’t be disputed. Every piece of equipment is unique in its own way. There may be somewhat different specifications between the assets being valued and what is available as a comparison in the market. Materially different hours or mileage may become a factor to consider as well as any recent upgrades or refurbishments completed.

Knowing the original purchase price of the machinery, even if it was acquired 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 in their ability to provide all the right answers. This is perhaps the biggest challenge in the equipment industry. Unlike business valuation, where databases and historical financial data are almost always available, or real estate, which has a tendency to provide a wide array of published comparable property resale data, the machinery markets can behave in very inconsistent ways.

You will commonly see the same makes and models of equipment, with virtually identical specifications and usage, listing and selling for vastly different prices. The auction marketplace, which reflects billions of dollars of used equipment sales annually, experiences varying levels of demand, any of which may play a part in developing values for many types of assets. With the recent growth in online auctions across these markets, these disparities can be even more pronounced.

In summary, the historical data you can provide to an appraiser that complements their independent research and analysis will be very helpful in ultimately determining a reasonable and supportable value for your M&E.

Tags: valuation, accredited appraisers, Machinery & Equipment Appraisals, purchase price