Equipment Appraisal Blog | Understanding Machinery Appraisals

Whether you're a business owner, investor, or lending institution, it's important to understand the current value of the machinery and equipment involved with a transaction you're contemplating. It's also vital to look ahead and estimate the future value of these capital assets so you can manage risk and leverage equity that will come into play down the line.

If you are not comfortable estimating these values on your own or if the proposed deal calls for an independent third-party valuation, it's time to contact an equipment appraiser who can provide an accredited report that will document this for you.

From the business owner's perspective, you might have an immediate need to purchase new or used equipment for a large 5-year construction or manufacturing project that requires a sizable cash outlay to handle the additional production capacity. You look to buy at a reasonable price point, but just as importantly, you will want to factor in the resale value and future benefit of ownership as part of the budget. For example, suppose the initial investment into the project is $2,000,000, and you estimate the future value of the machinery in five years at $500,000. In that case, this will offset the short-term capital outlay and greatly increase the profitability of the project once completed. You can then either sell off the additional equipment for immediate gain or determine that integrating the assets into your ongoing operation is more beneficial.

From an investor, lending institution, or leasing company viewpoint, collateral review, and asset management are critical components of your business to manage risk and maximize returns. Financing and leasing companies will look to provide their clients with lower monthly payments by including an unamortized residual amount at the expiration of the deal term. By understanding the future value of the collateralized machinery, you can assess a reasonable residual value that can be realized by selling the equipment back to the existing customer or in the open resale market.

From my experience, banks and leasing companies will conduct an independent appraisal at both Fair Market and Orderly Liquidation Value levels and ask the appraiser to include a future value estimate that matches the loan or lease term. They will then discount those values by a certain percentage they are comfortable with to allow for any unforeseen changes in the market and potentially make additional gains on the resale, thus boosting the profitability of the transaction.

Whatever situation you find yourself in, consider engaging with a qualified, experienced, and credentialed machinery and equipment appraiser who can provide an independent opinion of value that will best support and document future value estimates.

If your business requires a lot of machinery and/or vehicles to operate every day, there will come a time when you need to replace older models and upgrade your inventory to stay ahead of the competition and improve efficiency. If you don’t have decent trade-in options or decide to try and maximize the resale price by selling privately, you will want to better understand current market value levels.

The first thing you can do to accomplish this is to find an independent accredited equipment appraiser who can provide you with a supportable assessment of value, which will assist you throughout the process and offer additional perspective on where you can expect your resale price to fall.

The professional appraiser can provide a range of values at different market tiers, which you can use to leverage and support a fair sale price while negotiating with potential buyers. Here are the steps involved with locating and engaging with a qualified equipment appraiser:

1. Once you locate and reach out to a valuation expert during your search process, they will contact you and ask for the specifics involved with your situation and request a detailed asset listing, which will assist them in understanding the amount of work involved and provide you with a fee quote. During this phase, the overall scope of work can be discussed, including the types of values needed (typically Fair Market and Orderly Liquidation), while determining whether a desktop or an on-site appraisal is more appropriate. Cost, timing, and the details you have available will all play a part in this.
2. As soon as you are engaged, you will work further through the process so the valuation professional has the best understanding of the equipment you are selling so they can provide you with a supportable appraisal.
3. When the report is delivered to you, it will include itemized values for each piece of equipment at the tiers agreed to, along with the total for all the assets involved. If you had earlier determined that Fair Market and Orderly Liquidation are the best types of values to estimate, you would have a range to work within when setting initial pricing and ultimately negotiating a final sale.

In summary, working with an appraiser in the early stages of your plan to resell older equipment will give you a distinct advantage that will provide you with the best chance to maximize the realized sale price of your used assets.