Equipment Appraisal Blog | Understanding Machinery Appraisals

When it comes time to have a business appraised, whether it’s for a potential sale, purchase, re-financing, new partner investment, or even for internal planning and accounting, if the company owns personal property, machinery & equipment, it makes sense to consider valuing these assets as well.

A business appraisal will involve a review of the company’s financial statements, which include these tangible assets listed at some depreciated cost basis, and may not accurately reflect current market value. Especially if the property was purchased years ago and subject to a short-term, accelerated form of depreciation. This will lead to a likelihood that the net book value on the account ledgers for the personal property and equipment will be at or close to $0.

If the company being appraised will, in part, be affected by re-establishing the current value of the personal property and equipment, then engaging in a distinct appraisal for these assets should accompany the business valuation.

As an example, if the business appraiser is valuing a machine shop and, while reviewing the financial statements, finds a net book value of $100,000 in depreciated machinery & equipment, this is the figure he will use for the overall asset valuation analysis. If, however, an equipment appraisal is completed in conjunction with the valuation effort, and the current market value for these same assets is estimated at $500,000, then this figure will override the internal depreciated number, realizing a significant increase in overall tangible asset value.

This adjustment to the company’s books will truly reflect the overall value of the business and can be used for any of the purposes discussed earlier. It will also provide peace of mind to all parties involved in the larger transaction being reviewed, knowing that an independent third-party appraiser has updated the key components of the business that drive overall value.

There are a handful of appraisers in the marketplace who can value both the machinery & equipment and overall business for their clients. Many of them are larger, conglomerate-type companies who may overcharge you. Equipment Appraisal Services and our sister company, Business Valuation Specialists, can provide this capability to you at an affordable cost while delivering the highest level of service available. Contact us in the comments section below, at equipmentappraisal.com, or businessvaluations.net to see what we can do for you and your business.

When you speak with potential appraisers about engaging in a valuation effort, whether it’s for machinery & equipment, personal or real property, business, or anything else, you should be asking if their work complies with USPAP standards. Before you ask the question, though, here is an overview of what USPAP means so you can better understand the importance of this appraisal requirement.

What is USPAP

USPAP is short for Universal Standards of Professional Appraisal Practice and is considered a type of quality control to a formal valuation process. It was established prior to the Savings and Loan Crisis in the late 1980s and then taken over by a committee called The Appraisal Foundation (TAF) to ensure that artificial inflation of an appraisal did not grow out of control again as it did during that period.

The standards that comprise USPAP are updated every year which allows it to stay current with changes in the industry and any new regulations. Though it's mainly used in the US, it has been adopted in whole or part by a large number of professional appraisal organizations in other countries. Its focus is not on controlling the actual methods an appraiser utilizes but on specific standards for the appraiser’s qualifications, ethics, scope-of-work rules, report writing requirements, record-keeping, client disclosures, signed certifications, and related topics.

There are specific standards that pertain to all types of appraisals and can vary by valuation discipline, including machinery & equipment, business, real property, and personal property. As an accredited appraiser, whether you are a Senior ASA with the American Society of Appraisers (ASA) or affiliated with another valuation group, you are required to meet the qualifications for USPAP. This begins with a 15-hour course for first-time professionals, with continued compliance every two years to ensure the appraiser stays abreast of new developments. The follow-up courses are 7 hours long, however, if you miss one of these 2 year periods, you are required to go back and take the 15-hour course again.

The appraiser is issued a certificate after each course, which can be provided to you upon request. Once you have confirmed the valuation professional is USPAP compliant, you will have confidence that he or she is well-educated and experienced in the appraisal profession, and can deliver a well-researched, supportable report.

Becoming an accredited appraiser requires continuing education not only in USPAP but as an ASA professional as well. By understanding the USPAP Appraisal Standards and how they impact your valuation in terms of the individuals involved in the work effort, you gain valuable insight into the importance of engaging with the right people to complete this for you.

Look Far and Wide and be Patient Before you Liquidate your Machinery & Equipment

Given the sharp downturn in the oil and gas field production industry during the last couple of years, with energy companies dealing with low market prices and oversupply, it is difficult to imagine the market ever returning to the boom days it enjoyed in the past. With many drilling and service companies currently sitting on their equipment, waiting for some positive news, it may seem like there is no light at the end of the tunnel.

Hydraulic fracturing or "fracking" as it is commonly referred to, is a process of drilling and then injecting water, sand, and chemicals into the earth, where the rock, or shale, below is fractured and, as a result, releases oil and gas. This industry has been heavily regulated, and, although it produces natural gas which is considered "cleaner" than coal, it has been harshly criticized for various health and safety reasons, among others.

The early results of fracking led to an oversupply of energy sources in the US, Canada, and various overseas countries, however, the resulting issues included a sharp drop in oil prices along with many energy services companies taking huge losses given all the costs and penalties of doing business.

If you own or work for a company that services the oil and gas fields where fracking was commonplace in the past but has since dried up, it may be time to complete an updated equipment appraisal on your equipment and begin to look outside your local resale markets to potentially sell some of your excess inventory of assets. There are still pockets in North America as well as overseas where the oil and gas markets remain active, and you may be able to find an opportunity to receive a fair price for your equipment.

As an alternative to liquidating through an auction service or sitting idly by while the uncertainty grows in this industry, you may want to consider engaging in a longer-term hybrid plan of selling what you can at fair prices and paring down your business to a more reasonable level, in anticipation of some kind of upward market turn in the months to come.

These market fluctuations can be severe in the oil and gas industry, and maybe no more so than it is experiencing at present, however, historically, there have always been changing economic developments over the years which turn things around when you least expect it.

Along the way, consider obtaining an updated equipment valuation from an independent accredited machinery & equipment appraiser who can provide realistic values on your assets without the additional agenda of trying to assist in your resale effort.

Business owners, buyers, sellers, investors, banks, leasing companies, financial institutions, investment firms, business consultants, insurance claimants, attorneys, courts, business appraisers, accountants, tax auditors.

What do all these types of companies, individuals, and institutions have in common? At some point, they will all require an independent valuation of machinery & equipment, personal property, and related capital assets to support their larger transactional needs.

Many of these entities have never worked with an equipment appraiser before and would prefer to hire a company that can facilitate the process and provides an efficient, effective, defendable analysis and report that will hold up to scrutiny. The best way to ensure this is to engage an accredited machinery & equipment appraiser who has years of experience working in any number of different markets and understands their client’s specific needs in the context of the overall transaction at stake.

In order to select the right appraiser, the business or individual responsible for vetting the appraiser should look for the following:

• A current curriculum vitae (CV) that highlights the valuation professional's experience and work history.
• Validation that the appraiser is accredited through the American Society of Appraisers (ASA) with a senior designation and complies with the Uniform Standards of Professional Appraisal Practice (USPAP). Both of these organizations are nationally recognized and require continuing education to maintain their credentials.
• Responsiveness and a professional work ethic from the first point of contact to the completion of the assignment.
• Thoughtful discussions on the scope of work effort involved and assistance in formulating a timeline and game plan to complete the valuation effort in conjunction with the overall transaction.
• A summary of the appraiser’s experience working with attorneys on business dispute cases where litigation support, deposition, and court testimony are involved. This is a critical component to validating the appraiser’s true experience as these seasoned professionals have to formally support and defend their work product in a legal setting.

In summary, this due diligence effort is an important first step in selecting the best appraiser to work alongside you and will create value-added to the overall goal of the business or individual in need of an equipment valuation. Settling for anything less than an experienced, accredited appraisal firm to assist you in these efforts can lead to an undesirable outcome.

For machinery & equipment (M&E) appraisers, there are basically two approaches to value that are ultimately relied upon when completing valuations: the Sales Comparison Approach and the Cost Approach.

Here is a brief description of each:

The Sales Comparison Approach

The Sales Comparison Approach indicates value by analyzing recent sales (or offering prices) of properties that are similar (i.e., comparable) to the subject property. If the comparable data is not identical to the properties being appraised, the selling prices of the comparable items are adjusted to equate them to the characteristics of the properties being appraised.

The reliability of this technique is dependent upon the degree of comparability of each property with the property under appraisal; the time of the sale; the verification of the sale data; and the absence of unusual conditions affecting the sale. This approach focuses on the actions of actual buyers and sellers.

The Cost Approach

The logic behind the Cost Approach is the Principle of Substitution: a prudent buyer will not pay more for a property than the cost of acquiring a substitute property of an equivalent utility.

Using the Cost Approach, the appraiser starts with the current Replacement Cost New of the property being appraised and then deducts for the loss in value caused by physical deterioration, functional obsolescence, and economic obsolescence.

The third approach to value, the Income Approach, is rarely used for M&E appraisals, and I will leave that discussion for another time. The Sales Comparison Approach is also commonly referred to as the “Market Approach”, however, don’t let that trick you into thinking the only time you rely on market data is under this approach. To effectively use the Cost Approach, an appraiser should rely on the marketplace as well, to estimate the variables involved with this approach, including replacement cost new, useful life, depreciation, and salvage value.

Perspective From Both Approaches

Every appraiser has their own process as to how they ultimately utilize the tools available to determine value. It is ultimately an independent, unbiased, subjective opinion, based on the gathering of a reasonable amount of data, which is developed during a research and analysis process.

To that end, from my experience, I have found it beneficial to take components from both approaches, established directly from the marketplace, and create a dual perspective that ultimately forms credibility checks to both, and provides the appraiser with supportable conclusions. Given that comparable sales data can tend to be inconsistent from machine to machine, even from the same sources, this blended approach can create a way to make sense of all the data points and better understand how particular assets should depreciate in the marketplace under normal maintenance and wear and tear guidelines. The use of the Cost Approach in any other way, such as using straight-line depreciation to cover all forms, or trying to develop credible levels of replacement cost and obsolescence by using broad industry data, is simply not reliable or supportable.

In summary, regardless of how much weight an equipment appraiser places on either of these two approaches during a valuation analysis, they should assure their clients that the data collected comes directly from the marketplace. The independent sources that an accredited M&E appraiser can find for virtually any type of asset are out there and available, they just need to do a bit of digging to find them