Equipment Appraisal Blog | Understanding Machinery Appraisals

One of the benefits of choosing to become an accredited equipment valuation professional is the diversified range of clientele who need these services. Regardless of the state of the overall economy or particular industry, there are potential customers that come from several different market sectors looking for experienced appraisers to assist them with their transactional or case-related deals.

Here are a few examples of the more common client types:

Business Owners

Companies that utilize a lot of equipment in their day-to-day operations commonly look to buy used equipment to replace older assets that need to be sold in the secondary market. Appraisers can assist in both of these situations.

Banks and Leasing Companies

Whether a traditional bank is looking to collateralize a loan or a leasing company wants to set realistic residual values and resell returned equipment, accredited machinery appraisers can help value both the front and back end of these deals.

Private Equity Groups

In the merger and acquisition markets, these groups will look to invest in certain equipment-based companies by acquiring them, reorganizing them, and maximizing their profitability over a short-term period. Eventually, they will resell the business within the respective industry. Machinery appraisals are needed from a risk, accounting, and tax perspective.

Attorneys-Partner Dispute Work-Divorce-Insurance

For experienced appraisers with the right credentials, teaming up with law firms on internal and external business disputes, divorce cases, insurance claims, tax issues, and related areas offers plenty of opportunities to get involved with litigation work. This allows one to build up a resume of testimony experience as well.

Individual Donors

Donation appraisals are quite common. People will give their used assets to technical schools, universities, museums, and other non-profits requiring a qualified appraisal for items valued over $5,000.

In summary, this broad range of clientele affords machinery and equipment appraisers several avenues to grow their business effectively. Think about the types of clients that would best serve your business.

Developing the foundation to becoming an independent equipment appraiser can come from many different career paths. It can be beneficial to work in another capacity before gaining accreditation in this lesser-known valuation discipline. My background began in equipment finance, leasing, and the asset management side of that business.

When people hear the term asset management, they may first think of the financial investment “money” side of the practice. However, for the past 40+ years, it has become a significant component of every equipment lending business as well.

The risk profile associated with every machinery and equipment loan or lease needs to be leveraged with the internal ability to understand better the value of the assets being collateralized by these investments. A potential exit strategy must also be put in place should the equipment be repossessed in a default situation or returned at the end of a lease expiration.

In the early days of equipment asset management, most finance companies relied on working with equipment brokers and auctioneers who managed their returned equipment and facilitated the sale of these assets under a liquidation scenario. This often resulted in exceptionally low returns to the lender, who then faced absorbing losses from their initial investments.

Working with these equipment dealers over time became an educational experience for internal asset managers, who learned how to better estimate current and future equipment values and how best to resell returned equipment for higher prices.

Over time, many of these equipment lenders, banks, and leasing companies sought out experienced appraisers and certain industry experts to work more directly with them to minimize future investment risk and maximize the return on their used equipment sales.

In many cases, they eventually hired them full-time to manage their portfolios while working closely with the rest of the investment team on a day-to-day basis to create a synergized relationship with the rest of the operation.

It is common today to see accredited appraisers working internally for many larger banks and leasing companies. Having their asset managers educated and experienced in independently appraising machinery and equipment creates the best risk profile for the financial services business, and it allows for the opportunity to maximize the resale value of their returned equipment portfolio.

Being accredited equipment appraisers affords us the opportunity to be aware of the overarching transactions that our valuation work is tied to. In many cases, it is a straightforward buy/sell scenario in which our client is looking to resell used machinery that has become excess to their operation or is being upgraded with newer models.

Most times, our customers request we estimate Fair Market Value, which is the gold standard definition of value when looking at an arm’s length transaction where both the seller and buyer are on an even footing. This level of value is ideal from the seller’s perspective, given that they can expect to receive the best price for their equipment. However, there may be factors involved that will create a different situation.

For example, the owners may not normally be in the business of remarketing used equipment and need to turn to machinery brokers or dealers to facilitate a sale. Banks and leasing companies that recover their equipment and need to resell their assets would also fall into this category.

Time can also be a factor that plays into the equation. Some resellers would prefer to cash out of their used equipment sooner than later, which will result in a level of compulsion on their behalf that will ultimately affect the sale price.

In these situations, the seller needs to understand what a reasonable range of value is so they can be realistic with expectations when entering the unfamiliar scenario of reselling their used equipment.

Appraisers can greatly assist with developing this range as they can suggest to the client that they include both an Orderly and Forced Liquidation Value along with the Fair Market estimate.

Having two or three different value premises to consider instead of one will provide realistic expectations depending upon the situation the seller finds themselves in. If they would rather avoid being directly involved in the resale effort altogether, they might consider placing their assets in an auction, which would be more in line with forced liquidation. Or if they end up selling directly to a used equipment dealer, they may look to realize an orderly liquidation value level.

Whatever situation you find yourself in when needing to resell used equipment, consider looking at a range of values, which can be accomplished by speaking with an experienced appraiser who understands the differences and can help steer you in the right direction.

Whether you're a business owner, investor, or lending institution, it's important to understand the current value of the machinery and equipment involved with a transaction you're contemplating. It's also vital to look ahead and estimate the future value of these capital assets so you can manage risk and leverage equity that will come into play down the line.

If you are not comfortable estimating these values on your own or if the proposed deal calls for an independent third-party valuation, it's time to contact an equipment appraiser who can provide an accredited report that will document this for you.

From the business owner's perspective, you might have an immediate need to purchase new or used equipment for a large 5-year construction or manufacturing project that requires a sizable cash outlay to handle the additional production capacity. You look to buy at a reasonable price point, but just as importantly, you will want to factor in the resale value and future benefit of ownership as part of the budget. For example, suppose the initial investment into the project is $2,000,000, and you estimate the future value of the machinery in five years at $500,000. In that case, this will offset the short-term capital outlay and greatly increase the profitability of the project once completed. You can then either sell off the additional equipment for immediate gain or determine that integrating the assets into your ongoing operation is more beneficial.

From an investor, lending institution, or leasing company viewpoint, collateral review, and asset management are critical components of your business to manage risk and maximize returns. Financing and leasing companies will look to provide their clients with lower monthly payments by including an unamortized residual amount at the expiration of the deal term. By understanding the future value of the collateralized machinery, you can assess a reasonable residual value that can be realized by selling the equipment back to the existing customer or in the open resale market.

From my experience, banks and leasing companies will conduct an independent appraisal at both Fair Market and Orderly Liquidation Value levels and ask the appraiser to include a future value estimate that matches the loan or lease term. They will then discount those values by a certain percentage they are comfortable with to allow for any unforeseen changes in the market and potentially make additional gains on the resale, thus boosting the profitability of the transaction.

Whatever situation you find yourself in, consider engaging with a qualified, experienced, and credentialed machinery and equipment appraiser who can provide an independent opinion of value that will best support and document future value estimates.

If your business requires a lot of machinery and/or vehicles to operate every day, there will come a time when you need to replace older models and upgrade your inventory to stay ahead of the competition and improve efficiency. If you don’t have decent trade-in options or decide to try and maximize the resale price by selling privately, you will want to better understand current market value levels.

The first thing you can do to accomplish this is to find an independent accredited equipment appraiser who can provide you with a supportable assessment of value, which will assist you throughout the process and offer additional perspective on where you can expect your resale price to fall.

The professional appraiser can provide a range of values at different market tiers, which you can use to leverage and support a fair sale price while negotiating with potential buyers. Here are the steps involved with locating and engaging with a qualified equipment appraiser:

1. Once you locate and reach out to a valuation expert during your search process, they will contact you and ask for the specifics involved with your situation and request a detailed asset listing, which will assist them in understanding the amount of work involved and provide you with a fee quote. During this phase, the overall scope of work can be discussed, including the types of values needed (typically Fair Market and Orderly Liquidation), while determining whether a desktop or an on-site appraisal is more appropriate. Cost, timing, and the details you have available will all play a part in this.
2. As soon as you are engaged, you will work further through the process so the valuation professional has the best understanding of the equipment you are selling so they can provide you with a supportable appraisal.
3. When the report is delivered to you, it will include itemized values for each piece of equipment at the tiers agreed to, along with the total for all the assets involved. If you had earlier determined that Fair Market and Orderly Liquidation are the best types of values to estimate, you would have a range to work within when setting initial pricing and ultimately negotiating a final sale.

In summary, working with an appraiser in the early stages of your plan to resell older equipment will give you a distinct advantage that will provide you with the best chance to maximize the realized sale price of your used assets.