Equipment Appraisal Blog | Understanding Machinery Appraisals

The importance of maintaining your company’s machinery cannot be stressed enough, as it provides immediate and future benefits to the reputation and overall success of your business. It is just as essential to track and record these practices in as much detail as possible, so you can perform reviews, understand when component replacements and refurbishments are necessary, and have them available to buyers when you look to resell these assets in the future

Capital machinery & equipment represent significant investments for businesses that manufacture goods, engage in earth moving and construction projects, manage utilities, and many other types of operations that offer products and services to their respective clients. And because equipment depreciates and has limitations to its normal useful life, it is even more critical to prioritize consistent maintenance practices that will minimize a loss in value and maximize the time before needing to replace them.

Market perception is potentially the most important factor when your business and its associated assets are involved with external transactions, whether that involves a sale, working capital infusion, new equity investment, bank financing, insurance assessment, or anything else. There will come a time when assessing the value of your used machinery & equipment will be a necessary step in a larger process, the success of which will hinge on your company’s growth or transition.

Customer perception can easily be swayed in one direction or another, based on their opinion and understanding of the integrity of your work ethic. If your machinery is not well maintained and accurate recordkeeping is not available for review, these clients may arbitrarily decide that there must be other deficiencies and flaws with your company. In the counter scenario, there will be a more favorable opinion of business practices in general if your machinery is in good operating condition with updated records available.

Without these maintenance practices and records in place, when the time comes to resell your used equipment, potential purchasers will factor in any number of unknown expenses and investments that may be needed to bring the assets back into reliable service. The impact will affect not only the immediate sale but potentially any future dealings as well.

If you haven’t already, take some additional time to review these practices with your plant manager or maintenance supervisor, so you can create the best environment where your machinery & equipment will outshine your competitors.

Machinery and Equipment is perhaps the least understood type of property when it comes to appraisal approaches when compared with Real Estate and Business Valuation. This may be because, in large part, real property, such as buildings, land, and improvements, are commonly viewed as higher value, non-depreciating assets, while overall business appraisal considers the sum of everything a company has to offer in an investment or lending scenario.

When considering the three industry-accepted appraisal methods, Cost, Sales Comparison (Market), and Income approaches, machinery valuation will almost exclusively rely on the first two, while real estate and businesses commonly use the income approach as well.

There are a couple of primary reasons why this is the case. Historic and discounted future cash flows considered and utilized under the Income Approach can often be directly tied and measured with buildings and land in the form of rental and lease revenue, while a business appraisal is in large part determined by the internal financial performance of the company.

Machinery, along with other types of personal property, are considered support assets required to be utilized as a part of a larger working operation. Therefore it is impossible and impractical to try and allocate a portion of any type of business revenue to the equipment itself. Even if machinery is the primary asset involved with the business, there are many other factors to consider in the overall company performance which directly or indirectly drive revenue. To try and allocate all or a part of these cash flows to it would be unfeasible.

Equipment value can be directly measured under the cost and market approaches by researching what new and used equipment sells for in the marketplace while applying reasonable factors for normal useful life and annual levels of depreciation. Regardless of how often the machinery operates or how integral it is to the day-to-day operation of the business, the value of these types of assets is driven by what an unrelated third party would consider paying for them, whether in its current operation or for another future use. What it costs to purchase and install these assets, new or used, in the marketplace, along with a review of maintenance history and current condition, are the driving variables behind what someone would pay for them, which ultimately translates to value.

If you are going to attempt to use the income approach to appraise equipment, make sure you have solid evidence that the cash flows are directly related to the machinery itself, and ensure that you are basing the analysis under a “highest and best use” perspective which takes into account the asset’s full potential to generate revenue. The income approach has its place in the appraisal industry, and in many cases with businesses and real estate, will be a primary factor in determining what they’re worth, however, for machinery, equipment, and other types of personal property, as a general rule, stick to the cost and market approaches to measuring these assets' true value.

Business owners get involved with a number of annual projects they need to get done in order to accomplish the goals set forth for continuing growth and success. These may require both internal employee and external advisory interaction and collaboration to complete them in a timely and orderly fashion.

When machinery & equipment appraisers are part of the mix, they should understand this broader perspective and their specific role in it, so they can provide the value-added you’re striving for to help move your company forward. When you consider engaging with a professional appraisal firm, ensure that their experience is commensurate with their ability to work within a larger team environment.

Some of the key variables that valuation experts should consider and suggest to their clients within this overall framework are:

The Effective Date of the Valuation: The written report date and effective date are often different based on the circumstances.

The Premise(s), or Definition(s) of Value: There are several distinct market levels of value to consider in every appraisal.

Desktop vs. On-site Approach: Which of these options is the right choice given the underlying requirements of the deal and the quality of the data already developed?

Additional Opinions to Include: Experienced Accredited Appraisers can also provide comments on topics such as future (residual) equipment value and remaining useful life. Is this something that might bring added value to your transaction?

In summary, ensure that the valuation firm you select will have its most senior experts directly involved with the appraisal so you can feel secure that the analysis will be well thought out and thoroughly prepared. Less experienced appraisers can have a support role in the work effort, however, avoid the firms who use their junior staff to complete all the research and legwork with the senior manager only taking a minor review role. This can lead to costly errors you won’t know about until it’s too late.

Your longer-term business goals are important and will help steer your company toward future success. The ability to count on the right team to ensure you reach those goals is essential.

The holiday season is usually a relaxing and joyous time for families and friends while providing an opportunity to take a much-needed break from the year-long toil of work and personal responsibilities. As a small business owner, the time off associated with the holidays may be limited, given the need to stay on top of a never-ending to-do list, close the books on the prior year, and plan ahead for another set of challenges as you turn the calendar page to January.

If your business involves running a lot of machinery & equipment, it might make sense to review annual usage and maintenance for your assets and compare with previous periods as well as what was budgeted for the year. Possibly consider making some reinvestments in your older machines or upgrading those that might have new options available, such as computer controls or more efficient process components.

Are you planning to grow the business or make any major internal investments? Consider an accredited equipment appraisal to allow you to leverage the equity available and obtain much-needed capital to get these projects off the ground.

Perhaps you are thinking about bringing in new investors, buying out existing partners, or even considering selling all or a portion of your business. Begin to look at key consultants who can assist in the efforts and provide an independent, unbiased, assessment of the company’s value, and its underlying assets.

Meet with your key employees to bounce ideas off one another based on their own experiences and perspectives, so you can obtain a well-rounded, thoughtful set of suggestions that might make sense to consider in the immediate future.

Every year brings a mix of both excitement and trepidation for most small business owners as they continue to work hard every day to make the most out of their niche in the marketplace and create additional value-added that can separate them from the competition. The earlier you begin to think about and ultimately implement your plans, the better chance you will have of a successful and desirable outcome.

Image Source: FBenjr123 license

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.