Equipment Appraisal Blog | Understanding Machinery Appraisals

The need to have an independent machinery and equipment (M&E) appraisal completed for your business can arise from any number of circumstances. The most common reasons are for collateral review with bank financing and leasing, merger and acquisition, purchase or sale, estate planning or settlement, divorces and business disputes, insurance, accounting, and tax requirements.

In all of these instances, Fair Market Value is estimated and deemed appropriate to rely upon; however, there may be reasons to consider lower-value premises such as Orderly and Forced Liquidation (Auction). Many finance companies and investors, as well as those not used to buying and selling equipment for a living, like to understand these lower-tier value levels given the likelihood they may not realize Fair Market Value in a real-world scenario.

Similar to estimating Fair Market Value, the appraiser will utilize available resale market data and consider factors such as replacement cost, useful life, depreciation, and other relevant components in their methodology. There are auction databases and other sources of information that can be found when researching liquidation values. Of note, auctions can tend to have inconsistent results with their sales depending on a variety of factors that determine the level of success a particular venue may have.

Given the appraiser will most likely be estimating Fair Market Value as part of their analysis, will they want to go back to the market and start over again with a liquidation assessment? Probably not. Instead, there are a couple of options where the valuation professional can establish reasonable liquidation value estimates utilizing Fair Market Value as a starting point.

One of these is to review databases and obtain opinions from market resellers regarding the average variance between the wholesale and retail markets. Databases involving vehicles and construction equipment, as an example, include this type of analysis estimating these different levels of value.

Depending on the level of resale activity for a particular type of equipment, you will see higher or lower margins between the fair market and liquidation value. Generally, the more active the market, the less differential you will see compared with equipment in a more specialized industry.

The value level of the M&E may also play a part in establishing a reasonable differential. A $500,000 piece of equipment may have a lower percentage margin than a $5,000 asset given what a reseller would try to target for a dollar profit margin between his wholesale price and the end user price. Similar to how an appraiser establishes Fair Market Value, they seek to rely on these variables to develop a pattern that makes sense when estimating liquidation value.

One of the most common documents an equipment appraiser will receive from their clients during the early stage of the valuation process is an asset depreciation report, which tracks all the capitalized machinery, FF&E, real property, and improvements that a company has invested in and acquired over time. This document can be useful in the valuation process; however, it is generally not reliable on its own.

The capitalized depreciation record will usually be categorized and itemized by type of asset and includes the date of acquisition, dollar amount, and a brief description of the item. There will also be columns for accounting information so the company can internally track depreciation while providing a helpful tool for property tax and balance sheet purposes.

From an appraisal perspective, the original acquisition dates and associated investment amounts are the most beneficial pieces of information, however, with the descriptions typically abbreviated, it will be difficult to rely on the document to create an accurate itemized listing for the purposes of researching values. These documents can also be incomplete or include equipment that has long been disposed of. This is because companies will expense a portion of their equipment purchases while not having a consistent process in place for updating the report for accuracy.

It is important the appraiser and client review this listing together with the goal of expanding the descriptions while adding items that are not on the list and excluding those that should be removed.

For example, old computer equipment might have been sold or scrapped years ago for newer models but remain on the list, or there may be $10,000 worth of hand tools that were expensed over the years and never capitalized and depreciated.

The goal in any M&E appraisal is to create a refined list that is reasonably accurate and complete so the valuation process will be supportable. The primary focus can be on the larger, more valuable equipment while potentially grouping smaller asset types like office equipment and support tools so the process doesn’t get too bogged down and time-consuming.

In summary, when you provide an asset depreciation schedule as part of the data requested by the appraiser, anticipate the need to get more involved to afford them a better understanding of the detail behind it so they can develop a more accurate listing that represents your company’s machinery and equipment.

Simply put, the better the data provided, the better the result will be with the valuation. Discuss this topic with your appraiser proactively to ensure a timely and effective process.