Equipment Appraisal Blog | Understanding Machinery Appraisals

Going through a divorce is one of the most difficult experiences in people’s lives, and many can drag out interminably due to the inability to obtain a fair settlement given a lack of mutual cooperation. When one of the parties owns a business, the value of the company and its associated equipment should be independently assessed, however, the ability of professional appraisers to complete this task can be challenging.

It is common practice that an appraiser will engage with the ex-spouse who may have little to no involvement or understanding of the other partner's business, and they are simply looking to determine a fair value as part of the division of assets. The primary issue an appraiser must tackle is access to information. As with any work effort, the data behind the analysis should be inclusive, detailed, and accurate to properly assess a supportable conclusion. Unfortunately, the party who is the business owner can often create stumbling blocks to obtaining this information and may look to control the situation under their terms, while being selective with what they provide.

You might think the court system and the judge or arbiter involved would demand a certain level of cooperation and use their authority to manage this situation, however, there may be other factors in the divorce or with state laws that might limit their influence. Even in situations where court orders are issued compelling the disclosure and access of information relative to the assets and financial data of a business, there is no guarantee the owner will comply.

The appraiser might attempt to facilitate the situation where they can provide insight into their experience with similar situations while offering flexibility and options that might help the process move forward. They will likely need to work with incomplete information and make reasonable assumptions to fill in the blanks that may otherwise be provided in a more cooperative scenario. Ultimately, any third-party consultants engaged in a divorce proceeding will have a limited level of control in the process, and they will need to rely on their client’s and their attorney’s ability to influence the outcome.

If you are going through a divorce and need valuation services that you believe might be under a strained situation, ensure that you engage with an experienced professional appraiser who is familiar with these types of scenarios. You will need all the help you can get to accomplish your goal of a fair settlement while knowing a lack of cooperation will be a prominent factor during the process.

When your business is looking to acquire new equipment, one of the primary reasons that necessitate this is the need to replace older machinery and upgrade your company’s production capabilities. Your first instinct may be to trade in or resell your used assets, however, another effective option is to donate them to a local non-profit, such as a public school/university, hospital, research institute, charity, museum, or other tax-exempt organization.

Consider researching options locally or contact your old schools to see if they would be interested in acquiring the used equipment which they might utilize directly or be able to refer you to a facility they know might have an interest.

The benefits to this type of transaction are not only from an income tax deduction perspective but you can also provide goodwill for your business. You may also be helping another facility and the individuals they support by providing items they might not be able to afford otherwise. Scientific, medical, and technical research and education at the high school and college levels are areas that usually need resources to maintain and grow their foundations.

Before physically donating, make sure you check that the equipment is in good working order while cleaning it up and creating an itemized list of what you will be providing to the non-profit organization. This list will come in handy when filing your taxes as well.

If you know the overall value of your donated machinery will exceed $5,000, you will be required to obtain an appraisal to support the higher claim. The advantage you have here is that the price level will be measured at fair market value, which is very likely higher than any trade-in or resale price you might get from an equipment dealer if you tried to sell on your own.

>Look to engage with an experienced accredited appraiser who is familiar with the type of assets you are donating. Donation valuations are very common for equipment appraisers, and they can provide the support needed to ensure you receive a reasonable assessment of value.

Once the appraisal is completed, you will need to fill out an IRS form 8283 for noncash donations and have the appraiser review and attest to the reported value. You can submit this as part of your overall tax return.

Donations can also be completed for unused inventory such as spare parts and tooling. Companies that produce excess finished goods can also donate these items using the same process. Equipment appraisers with experience in valuing inventory can work with you on these types of donations as well. In summary, before you decide to resell your used machinery when replacing them with newer models, consider a donation as a more effective alternative.

When it comes to defining the term “assets” there are so many different types that it can be difficult to understand which belong in the various categories that appraisers are familiar with and can value based on their credentials and experience. Machinery & Equipment (M&E) appraisers have, by far, the broadest array of varying property types for which they may be capable of valuing.

The clear exceptions for M&E appraisers would be intangible assets, such as a company’s overall goodwill, customer lists, trademarks, patents, domain names, and the like; and real property, most commonly viewed as buildings, land, and their associated improvements. Other areas where different kinds of expertise are required would be gems and jewelry, fine art, antiques, and other collectible types of property.

Beyond these obvious distinctions, the vast majority of all other tangible assets could potentially fall under an equipment appraiser’s purview. Here are some examples that you might not have considered:

Tangible Personal Property

This is a very broad term that is intended to primarily distinguish an individual’s ownership vs. a business. Therefore, many of the asset types are the same as what an equipment appraiser would see in a company machinery appraisal. Items such as furniture, audiovisual equipment, trucks, automobiles, hobby shop equipment, and appliances are a few of these asset types.

FF&E

This term stands for furniture, fixtures & equipment. It is often considered a “catch-all” term that groups a company’s office equipment, such as printers & computers, as well as furniture, including desks, chairs, and filing cabinets together under one common category. Fixtures refer to those items that are removable properties and thus not considered a building improvement.

On-Hand Inventory

A company’s raw materials, finished goods, spare parts, tooling, and other types of on-hand inventory have tangible value to a business. It is common for machinery & equipment appraisers to educate themselves and understand reasonable approaches and techniques to value this kind of property.

In summary, if you own these kinds of assets, and need them appraised for any reason, your best bet is to consult with an experienced M&E appraiser and determine if they have the experience to get the job done.

Image Source: Bob Adams license

Many small to mid-size businesses that utilize a lot of machinery will likely have several older pieces of equipment that still operate efficiently and effectively. As long as maintenance practices have been steady over the years, older equipment will continue to be an important component of your company’s operation, and you can avoid the need to spend a lot of money replacing them.

When you look at how these older assets depreciate and resell in the used markets, you soon realize that once they hit a certain age level, their value will begin to level off, assuming they’ve been taken care of over their lifetime.

As a general rule, many types of machinery and equipment will depreciate more during the first half of their useful life and slow down considerably over the second half. That is due to factors such as lapses in warranties, no recapture for initial up-front sales costs such as taxes, freight, rigging, and overall secondary market behavior, which, over the years, has created this pattern based on the buying and selling habits of equipment owners.

The closer machinery gets to the end of its life, the slower this annual loss in value will be. Depending on the type of equipment, once it falls within a certain age range, say 10-15 years old, you will see no material difference in what those same models sell for in the secondary market. Even 20+-year-old pieces of machinery, considered well past their normal life will resell at similar levels as long as they remain in operable condition and have had components parts replaced when necessary.

This concept is also bolstered by the highly active secondary markets for used equipment with both private and public sales activity reaching billions of dollars every year. As an example, if you track this activity, you will commonly see a 15–20-year-old wheel loader sell in the same price range as a 10-12-year-old machine. Of course, there are other variables at play, such as the commonality and availability of certain model types, condition, and competition, however, the fact remains that older assets will have a much smaller value differential than newer machines.

The practices of owners and operators, as well as the buyers and sellers of used and new machinery, have helped create this pattern, and it has remained consistent over the decades. There is no denying that equipment loses much of its original new value over time. Once you better understand how it depreciates year to year, the more knowledge you will have when you are in the market to buy and sell these types of assets.

As an experienced accredited machinery & equipment appraiser, I am occasionally asked by potential clients if I have expertise in the specific industry they operate within. My response is that, after 40 years of involvement in the machinery & equipment world, I have worked within their industry several times, however as a professional appraiser, I go where the work takes me, across any and all markets and businesses. An appraiser’s focus is on valuation, which utilizes consistent approaches and methodologies across virtually all industries while gathering the more specific market data particular to each project to support their opinions.

In contrast, an industry expert will typically act as a consultant in any number of capacities that are specific to the businesses operating in these markets. For example, an aviation industry expert may have worked as an engineer throughout their career for companies that manufacture, purchase, sell, or provide services to the fixed-wing aircraft markets. In their current role, they now provide independent consulting to clients who are investing in these markets and need guidance on current trends and technologies.

Given the broad range of services an industry expert can provide, they can afford to keep their focus within specific markets and leverage their technical knowledge and relationship networks to add value to their client’s transactions. Valuation services may be one area they provide guidance on, however, given it is not their sole focus, it is not common to see an industry consultant have the accreditations a professional appraiser requires.

That said, experienced qualified appraisers and industry-focused experts are not mutually exclusive. Certain accredited equipment appraisers have a lot of experience within focused markets, while some industry consultants may have ample experience reselling used machinery and providing clients with value opinions along the way that would be considered reliable. Appraisers will at times work with an industry expert and consider them one of several sources that support their valuation opinions.

In summary, one important distinction to make is that an accredited appraiser adds value as an unbiased independent third party who will provide their opinions with no ulterior motives or overreliance on any one source. They can provide supportable valuation reports across any market or industry. In contrast, an industry consultant may act as a primary or exclusive source that provides their opinions on transaction-related topics based on their past experiences and knowledge specific to a market. Complete independence may not be a requirement but should be understood, to avoid a situation where the opinions and advice an industry expert provides are not tied to a transaction in which that consultant may be invested in themselves.