Equipment Appraisal Blog | Understanding Machinery Appraisals

Developing the foundation to becoming an independent equipment appraiser can come from many different career paths. It can be beneficial to work in another capacity before gaining accreditation in this lesser-known valuation discipline. My background began in equipment finance, leasing, and the asset management side of that business.

When people hear the term asset management, they may first think of the financial investment “money” side of the practice. However, for the past 40+ years, it has become a significant component of every equipment lending business as well.

The risk profile associated with every machinery and equipment loan or lease needs to be leveraged with the internal ability to understand better the value of the assets being collateralized by these investments. A potential exit strategy must also be put in place should the equipment be repossessed in a default situation or returned at the end of a lease expiration.

In the early days of equipment asset management, most finance companies relied on working with equipment brokers and auctioneers who managed their returned equipment and facilitated the sale of these assets under a liquidation scenario. This often resulted in exceptionally low returns to the lender, who then faced absorbing losses from their initial investments.

Working with these equipment dealers over time became an educational experience for internal asset managers, who learned how to better estimate current and future equipment values and how best to resell returned equipment for higher prices.

Over time, many of these equipment lenders, banks, and leasing companies sought out experienced appraisers and certain industry experts to work more directly with them to minimize future investment risk and maximize the return on their used equipment sales.

In many cases, they eventually hired them full-time to manage their portfolios while working closely with the rest of the investment team on a day-to-day basis to create a synergized relationship with the rest of the operation.

It is common today to see accredited appraisers working internally for many larger banks and leasing companies. Having their asset managers educated and experienced in independently appraising machinery and equipment creates the best risk profile for the financial services business, and it allows for the opportunity to maximize the resale value of their returned equipment portfolio.

Being accredited equipment appraisers affords us the opportunity to be aware of the overarching transactions that our valuation work is tied to. In many cases, it is a straightforward buy/sell scenario in which our client is looking to resell used machinery that has become excess to their operation or is being upgraded with newer models.

Most times, our customers request we estimate Fair Market Value, which is the gold standard definition of value when looking at an arm’s length transaction where both the seller and buyer are on an even footing. This level of value is ideal from the seller’s perspective, given that they can expect to receive the best price for their equipment. However, there may be factors involved that will create a different situation.

For example, the owners may not normally be in the business of remarketing used equipment and need to turn to machinery brokers or dealers to facilitate a sale. Banks and leasing companies that recover their equipment and need to resell their assets would also fall into this category.

Time can also be a factor that plays into the equation. Some resellers would prefer to cash out of their used equipment sooner than later, which will result in a level of compulsion on their behalf that will ultimately affect the sale price.

In these situations, the seller needs to understand what a reasonable range of value is so they can be realistic with expectations when entering the unfamiliar scenario of reselling their used equipment.

Appraisers can greatly assist with developing this range as they can suggest to the client that they include both an Orderly and Forced Liquidation Value along with the Fair Market estimate.

Having two or three different value premises to consider instead of one will provide realistic expectations depending upon the situation the seller finds themselves in. If they would rather avoid being directly involved in the resale effort altogether, they might consider placing their assets in an auction, which would be more in line with forced liquidation. Or if they end up selling directly to a used equipment dealer, they may look to realize an orderly liquidation value level.

Whatever situation you find yourself in when needing to resell used equipment, consider looking at a range of values, which can be accomplished by speaking with an experienced appraiser who understands the differences and can help steer you in the right direction.