Equipment Appraisal Blog | Understanding Machinery Appraisals

Specifying the use of an appraisal report is another requirement that accredited/certified appraisers need to conform with. Recently, we discussed identifying the intended report users, and the actual use of the report can be indirectly related to this. The importance of specifying the intended use of the report is primarily to protect the appraiser should their report somehow make its way into the hands of a third party unrelated to the original stated use or the intended users themselves.

Once the appraiser delivers their report to the client, the level of control they have as to its future distribution begins to lessen. It is not uncommon for the appraisal report to be later sent by the client to various other parties, some of whom may or may not be intended users.

One example of this would be where the client is a financial institution, which then sends the report to the target company being appraised and under consideration for approval to lend against the equipment as collateral for a loan. If the financing arrangement is not finalized, the bank’s client, who now has a copy of the report, will seek an alternative to obtain the financing they still need. Even though they were not the appraiser’s client, they will send the report to the new bank or leasing company, who in turn will review it and potentially contact the appraiser asking questions about it.

The appraiser needs to make it clear that the parties now involved are unrelated to the original client or original use of the report, however, if they would like to engage in an updated report specifically addressed to them, that might be a workable option.

Another example would be where an appraisal client who owns a company has all their equipment appraised for the intended use of selling the business. After the report is delivered, the sale never transpires, and the client decides later on to use the report to try and obtain a loan against the value of the machinery.

The appraiser might then receive a call from the bank they are working with that wants to use the report as the basis for financing. The appraiser needs to make it clear that the report was not written for the purpose of financing. but the potential exists to work with the bank by updating and expanding the report to satisfy the needs of a loan approval. This would be under a new engagement with a new client, similar to the prior example.

I have also seen instances where appraisal reports get drawn into litigation involving the company’s assets that were valued for a completely different purpose prior to the legal case. The appraiser must treat this the same way, making it clear to all parties involved that, even though the prior report was not intended to support the case at hand, they would be willing to assist in the situation. New discussions will need to take place to develop an updated report with a new intended use.

Every appraisal engagement needs to clearly define the scope of work before it can begin, as several things need to be clarified upfront. Two of these areas involve designating the specific client who will sign the contract and have control over the process, as well as the intended users, who, besides the client, will be additional parties allowed to have access to the report.

This may sound straightforward, and in some cases, it is, however, there are several instances where it won’t be clear in the early stages how this will need to be set up. For example, if the owner of the equipment is looking to obtain a loan to secure additional working capital for his business, there will undoubtedly be a bank or leasing company in the middle of the transaction that may prefer to be the primary client. The equipment owner can be listed as an intended user, which allows the bank to share the appraisal with them after it is finalized and delivered. The appraiser should not discuss the values or share the report directly with the owner at any time, without the bank client’s permission. This can be a bit tricky though, given much of the information the appraiser needs to complete the assignment will be coming directly from the owner.

In this same instance, there may be underwriters of the loan, such as the Small Business Administration (SBA) or the US Department of Agriculture (USDA), who have their due diligence to perform as part of the approval process and will want a copy of the report. The valuation professional should be certain they include these parties as intended users, and avoid communicating with the underwriters directly.

Another example might be with legal cases and/or estate settlements, with attorneys involved in the transaction, as well as trustees and partners. The same type of discussion should take place early on to clarify who the direct client will be as well as the additional intended users. This is not always done the same way, and it will be at the discretion of all parties to make it clear to the appraiser how they prefer to structure this.

The appraiser needs to control this process to a certain extent and make it evident that the client will be the primary party receiving the report, and the intended users should not be directly involved unless they are critical to obtaining certain data. If the intended users request a copy of the appraisal report, the client should be made aware and ideally be the one who sends the report to them.

In general, try to avoid co-client agreements as they will likely become even more convoluted than having multiple intended users. As the appraiser, when in doubt, always contact the client first and discuss any communications and requests coming from the intended users before you act on them and make it clear to everyone that the client has the final say in how the document flow should be handled.