Equipment Appraisal Blog | Understanding Machinery Appraisals

Whether you’re a business owner, investor, bank, leasing company, partner, key employee, insurance provider, or just someone buying, selling, or donating equipment, there are several instances where understanding value will greatly assist you. Quite often, however, the fees associated with business and equipment appraisals get in the way of making a sound decision; however, when compared with the benefits you gain, you should not hesitate to pull the trigger.

Generally speaking, appraisal services are designed to assist in facilitating the closing of a transaction, whether business or personal, and are also utilized in the settlement of disputes. These can come in many forms:

Bank Financing and Leasing

The traditional process of working with banks, leasing companies, and similar financial institutions will require a review of underlying assets in order to collateralize and secure a loan or lease. They also become critical in the event of a default or end-of-lease buyout. Whether you’re the lender or borrower, it’s a “no-brainer” to obtain an independent, qualified valuation of the business and related collateral.

Private Equity Investment

A secondary source of capital for small businesses or in an outright acquisition, private investment will allow companies to expand their resources, promote growth, or transfer ownership. Both the buy and sell sides of these transactions need to support their opinions of value with an accredited appraisal.

Buying and Selling

In any outright purchase or sale of virtually anything valuable, those involved will want to have a formal appraisal report on hand to confirm the fairness of the deal. Successful negotiations are the cornerstone of good business practice. A third-party valuation will assist in the process.

Settling a Partner Buyout or a Divorce

Partners in life and in business may eventually fall out of favor with one another, and separation becomes inevitable. Negotiating a fair settlement will be made clearer with an updated valuation.

Reporting Requirements

Whether it’s for accounting, tax, or insurance purposes, an unbiased appraisal will not only come in handy but may be a requirement of the underlying authorities reviewing the transactions. Many of these relate to independent valuation and review.

In summary, once you determine the importance of valuation and how it will facilitate the process of managing and closing any transaction, don’t hesitate to find the most qualified, experienced appraisers and make the investment. It will not only assist you today but will come in handy down the road when a similar situation arises.

Machinery & Equipment valuation relies in part on understanding the new and used trade markets and developing an analysis that reasonably reflects what the subject assets being appraised would be worth in those markets. Before you even start to investigate this research, an early component of an M&E appraisal work effort involves the receipt of detailed data from the client that clearly identifies the machinery, including specifications and purchase history.

The additional perspective an appraiser receives by obtaining this data at the beginning of the engagement has many benefits. It saves the appraiser time by having them recreate this information themselves and allows them to price the valuation more competitively, given the time saved by performing this task themselves. Asset history provides specifics about the machinery being valued, which builds the foundation for the appraisal.

Every piece of equipment is different in its own way. The specifications, hours, mileage, usage factors, as well as upgrades and refurbishments completed at certain points in time, will all factor into the ultimate conclusion of value.

Knowing the original purchase price of the machinery, even if it was 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 or inconsistent across multiple market sellers.

This is perhaps the biggest challenge in the equipment industry. Unlike business valuation, where databases and historical financial data are available and consistent in form, and real estate, where published comparable property resale data is more definitive, equipment market data can be erratic and full of gaps.

You will commonly see the same makes and models of equipment, with virtually identical specifications and usage, listed and selling for vastly different prices. The auction marketplace, which reflects billions of dollars of used equipment sales annually, experiences varying levels of demand, leading to less reliable data with a wide range of price points.

For every valuation assignment, consider performing a direct and/or indirect cost approach, which can be developed from the historical data provided by the client, as well as research into new equipment pricing in the market. This perspective will provide additional support and complement the market approach, ultimately determining a reasonable and supportable value for the equipment.