Equipment Appraisal Blog | Understanding Machinery Appraisals

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.

As an accredited professional appraiser who has been around a long time, I have taken a liking to working on valuation consulting projects to shake up the routine of the day-to-day standard appraisal work. I have found that the more experience you have, the more opportunities arise, providing opportunities to think outside the box a bit more than usual.

Valuation consulting can mean different things; however, the basic premise of these assignments is to provide insights and opinions to clients that are specific to valuation without the necessity of a formal appraisal report. These may be relevant for business and legal disputes, leasing and financing transactions, internal tax and accounting requirements, or even insurance cases. Typically, consulting projects will involve providing opinions of contractual documentation language, or the review of other valuation reports, where the knowledge and experience the consultant has specific to valuation and related topics can be relied upon.

Similar to valuation reporting, consulting provides an independent third-party assessment that can assist in internal decision-making or support litigation case arguments for your clients. It is important to consider bolstering your opinions with source material, just like you do for an appraisal, but also look to create a thoughtful and reasonable assessment of the opinions being requested.

Consulting assignments provide the chance to bring some of your unique experience and perspective to the table and allow you to elaborate on the relevant topics by drilling down on the specific points of contention. Consider gaining a broad understanding of the overall situation and the goals of the client to potentially create other opportunities to expound upon.

The more you understand the big picture, the better prepared you will be to provide further thoughts and opinions that may assist even further than initially anticipated. Just like any personal or work-related experience, the more you know about it, the better your response will be.

In summary, valuation consulting is probably not going to be a primary driver for an appraiser’s business, as the projects generally are few and far between. When they do arise, however, take full advantage of the opportunity as you will not only be helping your clients, but furthering your expertise as well.

There are many reasons why business owners need to have a current appraisal completed for their machinery and equipment. Refinancing, mergers and acquisitions, tax and accounting regulations, trade-in or liquidation, new investors, and business disputes, to name a few. For each purpose, it is important to have a clear understanding of the appropriate types of values that will fit the particular project, as there will likely be a material difference between them.

Here are the most common types of value premises utilized in equipment appraisal, and their definitions as listed by the American Society of Appraisers:

Fair Market Value-Installed

An opinion, expressed in terms of money, at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts, considering market conditions for the asset being valued, independent of earnings generated by the business in which the property is or will be installed, as of a specific date.

Fair Market Value

An opinion expressed in terms of money, at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts, as of a specific date.

Orderly Liquidation Value

An opinion of the gross amount, expressed in terms of money, that typically could be realized from a liquidation sale, given a reasonable period of time to find a purchaser (or purchasers), with the seller being compelled to sell on an as-is, where-is basis, as of a specific date.

Forced Liquidation Value

An opinion of the gross amount, expressed in terms of money, that typically could be realized from a properly advertised and conducted public auction, with the seller being compelled to sell with a sense of immediacy on an as-is, where-is basis, as of a specific date.

Fair Market Value-Installed is often used when the equipment is part of a manufacturing or production facility where a lot of additional costs are associated with the purchase and installation. Fair Market Value is perhaps the most recognized term and best represents an arms-length transaction with no other considerations. Both Orderly and Forced Liquidation values are utilized by banks for financing purposes and by sellers who don’t have the ability or reputation to market their machinery in competition with typical dealers.

Before undertaking the valuation project you are working on, discuss these different premises of value with an experienced accredited appraiser who can assist with making the right choice.

If you are a business owner who has a lot of equipment operating every day from a production perspective, why not consider maxing out its working potential by tapping into its other benefits? Ownership has many perks, including the ability to turn hard-earned equity into cash. Gaining access to working capital will allow you to invest in other areas of your business, such as expanding personnel or buying more machinery to handle growth needs.

Although industrial machinery and heavy equipment (M&E) will depreciate over time, as opposed to land and buildings, they continue to hold significant value through the years, as long as they are well maintained. If you paid cash for them, or your initial loans have been satisfied, even if they are fully depreciated on your books, the actual market value of these assets can be determined and used as the basis for new debt that results in a significant cash infusion for your business.

When you begin working with a bank or other financial institution, take the time to develop a detailed listing of all your M&E, while providing access to your original purchase documentation, if required. The most important data to list out would be the general description year, make, model, and serial number (or VIN) for each item. Specifications such as production capacity, size, length, tonnage, or any important capabilities will be useful.

You and your preferred lending facility can work together to begin the process of developing estimate values for all the M&E while understanding the requirements of getting approved for your working capital loan. Keep in mind the bank is investing in you and your company, while taking a lien against the equipment as collateral, therefore, it will be important for them to become comfortable with the transaction. Most lenders will approve a certain percentage of Fair Market Value or look at more conservative liquidation values as the driver of the loan amount.

An important next step will be to engage with an experienced, accredited machinery and equipment appraiser, who can independently support the value of your assets. They will research the industry and develop opinions of value at various resale levels in the market while utilizing sources who are involved with the sale of new and used machinery. The lender may allow you to arrange for the appraisal directly or prefer to handle it themselves. In either situation, you will need to participate throughout the process, to ensure the appraiser has the optimal amount of information to best understand the history and current status of your M&E.

This type of unbiased report will independently verify a reasonable value for all your M&E, so you can get approved for that working capital loan your company needs to continue to grow and be successful today and for years to come.

As appraisers, we are at times asked to estimate orderly liquidation value on a "net" basis, which adds an anticipated cost or expense element to the conclusion. These requests most frequently come from banks and other financial institutions that are not in the business of buying and selling equipment. Their goal is to make a sound credit decision, based in part on a collateral review for a loan or lease, while including a more conservative worst-case scenario, where they would need to recover the equipment and sell it at a future point in time. This might occur in a customer default and repossession situation, bankruptcy, or an end-of-lease return scenario.

For a refresher, here is the formal definition of Orderly Liquidation Value from the American Society of Appraisers (ASA):

Orderly Liquidation Value is an opinion of the gross amount, expressed in terms of money, that typically could be realized from a liquidation sale, given a reasonable period of time to find a purchaser (or purchasers), with the seller being compelled to sell on an as-is, where-is basis, as of a specific date.

This estimate is considered a "gross" amount, meaning that it excludes any associated costs of sale that may occur during the period leading up to and associated with the transaction. This is where the "net" component comes into play.

Net Orderly Liquidation Value will consider common expenses associated with a sale. These could include recovery costs such as dismantling, rigging, and shipping; short-term storage; marketing/advertising; and broker fees/commissions. Depending on each specific scenario, these expenses will vary, and some may or may not be applicable. For instance, the size and type of equipment and whether you can keep the machinery at its present location during the marketing period, are large factors pertaining to the removal costs. Leasing companies will often require their customers to return the equipment at their expense during the end of lease stages, while alternatively, in bankruptcy, the bank may need to arrange and pay for this themselves.

To that end, the appraiser will subjectively make reasonable assumptions as to what the average costs may be, in a hypothetical situation, based on their experience. They may determine the focus should be on storage and selling costs, which are more consistent and likely to occur in any situation. Either way, estimating net orderly liquidation value first requires a determination of the gross value, and then applying a reasonable percentage or dollar reduction to that figure, in order to arrive at a final conclusion. Some of the third-party sources relied upon in the normal course of the appraisal can likely assist the appraiser with this calculation.