Equipment Appraisal Blog | Understanding Machinery Appraisals

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There are times when a machinery & equipment appraiser needs to include a visual site visit inspection as part of their valuation assignment however, due to scheduling, location, or cost concerns, cannot complete the fieldwork themselves. When this occurs, it is imperative that an alternative game plan be developed to ensure the inspections are completed in a timely and professional manner while still obtaining the critical information an inspection normally produces.

One option is to engage with a collateral inspection company whose primary job description is physical asset verification. There are a handful of these types of firms in the marketplace, and most have a significant number of employees and contractors spread across the country that enables most inspections to be handled locally.

Ordering the inspection is a fairly straightforward process that can often be done by completing digital forms found on its website. These will provide them with the type of equipment, location, contact, and timing information. If necessary, you can add specific detailed instructions to the work order and directly engage with the local contacts if this level of management is required. You can track the progress of the scheduling and once the job is completed, you will receive a report that includes a number of photographs to go along with the asset verification report. Utilizing this type of equipment inspection service is typically cost-effective and efficient, and can be expedited in just a couple of days for an additional fee if preferred.

From the appraiser’s perspective, it is important to know when this service makes sense and when it might not be the best solution. Collateral inspection companies are not appraisers, nor do they usually have the expertise required to create a detailed asset listing from scratch in cases where the equipment detail you receive in advance is incomplete or non-existent. There will always be situations where you, as the accredited, experienced appraiser, will need to go out yourself and gather the detail necessary to properly identify and describe the assets to complete a credible valuation.

The quality and quantity of the data an appraiser receives at the beginning of an assignment will generally dictate if an on-site visit is required and, if so, whether a collateral inspection firm would be a good fit to assist with the fieldwork. Every valuation project is unique and it is the responsibility of the appraiser to understand how best to tackle the scope of work and deliver a reliable report.

Machinery & Equipment appraisals generally require an itemized asset listing to be presented to the valuation professional so they can understand the history and detail behind the assets and estimate the scope of work and associated time and costs involved to complete the project.

Businesses that own a significant amount of tangible property, but have not updated their internal records in a long time, may decide they don’t have the resources available to undertake the time-consuming task of compiling all this data. The sensible alternative may be to have the appraiser visit your facility and work with you and your team to effectively and efficiently accomplish the task.

Even cases where your machinery listing is current but not well detailed may bring about the need to have an on-site visual inspection completed to ensure an accurate and thorough result. Desktop valuations, where you provide all the information to the appraiser, work when there is enough data to comfortably understand the descriptive detail provided in an easy-to-read file format. Ideally, appraisers like to see the year (or effective age) of the equipment, as well as the make, model, VIN/serial number, and any additional options or specifications that might apply. Photographs will also need to be reviewed to reasonably estimate the condition of the machinery. Follow-up interviews with the appraiser may be required to confirm the details being reviewed.

If you choose to have the appraiser complete the field work and gather all this themselves, it can save you hours, if not days, and will provide a more personalized perspective for both parties to understand all the facets of the valuation effort, as well as the underlying transaction it will be supporting.

The cost variance between an on-site appraisal and a desktop can be significant, depending on where your business is located, the number and type of assets being appraised, and the overall logistics involved with the scope of work. Look to engage an experienced, accredited appraiser, who can facilitate the process with you, and can effectively work with your team to accomplish the task.

The benefis will far outweigh the cost, from both a short and long-term perspective, as you will be able to better accomplish the immediate tasks at hand, and have an updated, detailed, and accurate equipment listing going forward which you can use to maintain your records in the future.

Equipment leasing has been around for decades however many business owners still do not fully understand the pros and cons of these types of transactions. With many industries growing aggressively since coming out of COVID shutdowns and slowdowns, equipment leasing is a popular way to reduce excess working capital needed to acquire these assets.

So, what else should you be aware of before you sign a new lease agreement? Here are a few thoughts to consider:

I read an article from a major business publication posted earlier this year that claimed a company owns the equipment after the lease expires. This statement is very misleading and essentially untrue on many levels.

First, it depends on the type of lease you enter into. Most lease agreements include a purchase option of some type which must be exercised by the business in order to gain title or ownership. Certain lease contracts have a nominal purchase option, (as low as $1) at expiration however, these have to be treated as loans on your company’s books since there is a requirement that purchase options fairly represent the future value of the equipment to gain the off-balance sheet accounting benefits you would prefer to have.

More typically, purchase options are stated as a fixed percentage of the original purchase price, commonly in the 10-20% range, depending on the lease term, or based on the fair market value of the assets. If the options are not exercised at lease expiration in a timely fashion, the owner (Lessor) can compel you to return the equipment or continue to lease it for an extended period.

Make sure you carefully read the purchase option language before signing and determine if it makes sense based on your present and future plans. Track the lease internally and consider what you need to exercise at least 6 months in advance of expiration. Notify the Lessor as required to keep the original terms in place. It is easy to fall into a situation where you forget to respond as time goes by, and are put in a low-leverage situation with limited, undesirable options left.

An equipment lease is a great way to keep assets off your balance sheet as well as the associated debt which can make your company look highly leveraged. Instead, your business can treat the lease payments as an annual expense that can be written off. Depending on the type of lease you enter into, your accounting factors may vary, so ensure you consult with your tax accountant before finalizing lease terms.

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If you thought the end of the year might bring some normalization to the used vehicle and heavy equipment markets, think again. With two months to go until 2023, there has been little, if any, downward movement in price levels, and best-case predictions are that prices will level off to around 20-25% higher than in 2019-2020.

Even the most optimistic analysis for potential buyers will amount to the fact that normal depreciated loss in value seen year to year for used machinery has not only been wiped out but, has been substantially reversed in the form of appreciation. What is likely to happen is at least another year of inflated values for used equipment until the supply chain issues have been significantly adjusted to allow for new vehicle and equipment manufacturing levels to meet demand again. The effect of this is vastly higher than any typical annual cost of living increase which shakes up every measuring stick used in the past several decades.

This type of market activity has also thrown the appraisal industry for a loop. Recent vintage assets (1-5 years old) can commonly be seen priced where new machinery should be, and even above this level at times. Older equipment (10-20 years) levels are now where you’re used to seeing them for slightly used machines. The longer these trends continue, the more weight appraisers will need to place on this effect.

Common pricing databases are now reflecting these patterns as well. What was once thought to be difficult to support from a longer-term trend perspective is now becoming a permanent adjustment in the market that will likely not reverse even when things start to normalize. Insurance companies will need to consider this if they haven’t already when estimating depreciated replacement cost settlements for personal property. Accountants may see an opportunity to recapitalize their company’s asset values based on the support of the data being presented.

Similar to what has recently occurred with inflation on things like gas and food costs, the price will peak so greatly that when it eventually settles, it will probably remain significantly higher than it was a few years ago. Don’t fool yourself into thinking that the longer-term effects of inflation aren’t a big deal, and that pricing will go back to where it was “back then”. Based on everything we’ve seen in 2022, along with recent predictions from the experts in the field, we should get used to the elevated pricing in the used vehicle and equipment markets.

If you believe an updated valuation of your company’s assets might make sense given these changes in the market, ensure you engage with an accredited, certified appraiser to best understand the effects this may have on your long-term goals.

Most business owners have an opinion of what their assets are worth based on their day-to-day experience operating them. They probably remember what they paid for even their oldest vehicles and equipment while understanding the amount of maintenance and extra work that has been invested in them over the years.

If this holds true for you and your company, then why would there be a need to conduct an appraisal using an outside firm that doesn’t have this first-hand knowledge? What could they possibly know that you don’t?

The short answer is that a third-party appraisal is required from time to time. Whether it is your accountant, attorney, bank, investment partner, insurance agent, or a potential buyer, any of these employees or external relationships may recommend you obtain a valuation of the tangible assets for your business.

The advantages to obtaining an appraisal are not just limited to the requirement involved. For example, if your bank advises that the Small Business Administration (SBA) will be involved in your company’s refinancing plans, it will likely be a requirement to obtain an independent third-party appraisal of the assets, or collateral, supporting the new loan. Not only will the formal valuation report satisfy this need, but it will also provide you with an impartial, unbiased opinion of value for all your machinery, equipment, vehicles, and FF&E owned by the company. The report could be used for other internal needs as well, such as supporting a higher value for your overall business or updating property insurance coverage.

Any time you have an experienced, professional, third-party firm assist in validating the true value of your equipment, or any other facet of the business, the results will be viewed as realistic and objective, which brings a high level of credibility to you and your associates. It is always prudent to remove the inherent subjectiveness that might be weighing in with your own opinions.

As with any major life decision being considered, it is usually a good idea to obtain opinions from those who may be able to view things from a different perspective before the ultimate decision is made. Once trust is established with these partners, you will be able to rely on them to help you along the way.