Manufacturing equipment is valued by considering factors such as age, condition, capacity, make and model, configuration, obsolescence, and sales data from the used equipment marketplace. A machinery and equipment appraiser may use three approaches to value – the sales comparison, cost, or income approach – depending on the type of equipment and purpose of the appraisal.
Heavily installed manufacturing equipment can be particularly difficult to value because it is often custom-designed and integrated into the surrounding facility. Each manufacturing plant is unique, and two machines which look identical from the outside may have very different capacities, controls, or configurations. For these reasons, industrial equipment is often more difficult to value than mobile equipment such as construction machinery, farm machinery, or heavy trucks.
How Do Appraisers Determine Manufacturing Equipment Value?
There are three primary approaches appraisers may use to determine the value of equipment:
- Sales comparison approach: The appraiser compares the subject machine to similar equipment listed for sale or already sold in the marketplace.
- Cost approach: The appraiser considers the replacement cost of the machine and makes deductions for physical deterioration, functional obsolescence, and economic obsolescence.
- Income approach: The appraiser considers the future income or economic benefit associated with the machine, less the costs required to generate those benefits.
For manufacturing equipment, the sales comparison and cost approaches are most common. The income approach can be difficult to apply because the income produced by a machine is difficult to separate from the rest of the business. Real estate, employees, intellectual property, working capital, and other assets all contribute to the earnings of a manufacturing operation.
What Factors Affect the Value of Manufacturing Machinery and Equipment?
The factors which matter most will depend on the type of equipment, the purpose of the appraisal, and the valuation approach being used.
- Sales comparison approach: Important factors typically include age, make, model, condition, capacity, accessories and options, maintenance history, and controls or software.
- Cost approach: Important factors typically include replacement cost, effective age, remaining useful life, physical deterioration, functional and economic obsolescence, and expected end-of-life value.
- Income approach: Important factors include the income or economic benefit associated with the machinery and the expenses required to keep it operating.
No single factor determines the value of manufacturing equipment. An older machine in excellent condition with strong market demand may be worth more than a newer machine which is obsolete or difficult to sell.
How Does Installation Affect the Value of Manufacturing M&E?
One of the most important questions in a manufacturing equipment appraisal is whether the machinery is being valued as installed or on a standalone basis.
For example, consider a CNC machining center with a used value of $50,000. The machine requires a concrete foundation, air and electrical hookups, an electrical transformer, custom tooling, and other installation components with a contributory value of $25,000.
If the machine is being appraised as part of a complete operating facility, some or all of that installation may contribute value. A buyer of the complete facility can continue operating the machine where it sits. In this simplified example, the CNC machining center and its installation may have a combined value of $75,000.
Now consider the same machine being sold by itself. The buyer will likely have to disconnect it, remove it, transport it, and install it somewhere else. The existing foundation, electrical connections, and other installation components may provide little or no benefit to that buyer. In this case, the machine may be worth $50,000 with no additional value for the existing installation.
That is a $25,000 difference without changing anything about the machine itself. What changed was the appraisal scenario and what the hypothetical buyer is actually purchasing.
Why is Manufacturing Equipment More Difficult to Value than Mobile Machinery?
Mobile machinery – such as construction equipment, farm machinery, and heavy trucks – is typically mass-produced. A tractor manufacturer, for example, may produce thousands of units of the same model with a relatively limited number of configuration options.
These assets are also relatively easy to move. Construction and farm machinery can usually be loaded onto a trailer and transported at a predictable cost. A heavy truck can simply be driven to its destination.
As a result, mobile machinery is bought and sold in relatively high volumes through established public marketplaces. An appraiser can often find numerous relevant sales and listings when researching market value.
Manufacturing machinery is different. A metal stamping line, for example, may include several machines built or configured specifically for one application. The manufacturer may produce only a handful of similar systems, and each may have different capacities, controls, tooling, or configurations.
Manufacturing equipment can also be expensive and difficult to move. A metal stamping line may have to be decommissioned, disassembled, loaded, shipped, unloaded, reassembled, and recommissioned before the next owner can use it.
The result is a much thinner marketplace. Specialized manufacturing equipment may have a limited buyer pool, transactions may occur privately, and the comparables an appraiser does find may differ substantially from the subject equipment.
When good comparables are difficult to find, an experienced M&E appraiser may have to rely more heavily on marketplace research, conversations with dealers and manufacturers, professional education, and industry experience.
Fair Market Value vs. Liquidation Value of Manufacturing Equipment
The definition of value can have a major impact on the appraised value of manufacturing equipment.
- Fair Market Value (FMV) generally considers a willing buyer and willing seller, neither under compulsion to transact, with reasonable exposure to the marketplace.
- Orderly Liquidation Value (OLV) considers a liquidation scenario with a reasonable amount of time available to find buyers.
- Forced Liquidation Value (FLV) considers a much shorter sale period and is commonly associated with an auction or other forced disposition.
These differences matter for all industrial equipment, but they can become particularly important for specialized and heavily installed manufacturing machinery.
Consider an automated production line which cuts thin wood sheets, applies adhesive, stacks the sheets, and presses them into plywood. The line may be nearly one-of-a-kind. The same manufacturer may have built other lines, but each was customized for a particular customer and installed in a particular facility.
At Fair Market Value, there may be enough time to find one of the relatively few buyers who actually needs this type of line. The buyer has time to inspect the equipment, complete due diligence, estimate removal and installation costs, and negotiate terms with the seller.
Now put the same line into a Forced Liquidation Value scenario. How many qualified buyers are willing to purchase this specialized line on short notice? There may be only one or two. There may be none. And the buyers who do show up may discount their bids heavily because they have less time to investigate the equipment and greater uncertainty about what it will cost to remove and reinstall.
The difference between FMV and FLV in a situation like this can be substantial.
When Is a Manufacturing Equipment Appraisal Needed?
Common reasons for obtaining a manufacturing equipment appraisal include:
- Bank financing and collateral
- SBA lending
- Merger and acquisition due diligence
- Purchase price allocation
- Financial reporting
- Insurance
- Litigation
- Bankruptcy
- Divorce
- Estate and gift tax
- Property tax
- Business planning
The purpose matters because the same manufacturing equipment may be valued differently depending on the transaction or circumstance being considered. A certified M&E appraiser can identify the appropriate definition of value, valuation approach, and assumptions for the intended use of the appraisal.
Common Questions
How is manufacturing equipment valued?
Manufacturing equipment is valued based on factors such as age, condition, make and model, capacity, configuration, installation, obsolescence, and evidence from the used equipment marketplace. Depending on the equipment and purpose of the appraisal, an appraiser may use the sales comparison, cost, or income approach.
What factors affect the value of manufacturing equipment?
Important factors include age, condition, capacity, maintenance history, configuration, controls and software, installation, remaining useful life, market demand, and obsolescence. Which factors matter most depends on the type of machine and the purpose of the appraisal.
Is manufacturing equipment worth more when it is installed?
It can be. If a buyer can continue using the equipment in its existing location, the installation may contribute substantial value. If the machine has to be removed and relocated, some or all of the existing installation may have little value to the buyer.
What is the difference between fair market value and liquidation value for manufacturing equipment?
Fair Market Value generally assumes reasonable market exposure and a willing buyer and seller. Liquidation value considers a more restrictive sale scenario, such as a compelled seller or shorter sale period. The difference can be substantial for specialized or heavily installed manufacturing equipment.
When is a manufacturing equipment appraisal needed?
Manufacturing equipment appraisals are commonly needed for bank financing, SBA lending, mergers and acquisitions, purchase price allocation, financial reporting, insurance, litigation, bankruptcy, estate planning, property tax, and other business purposes.