Equipment Appraisal Blog | Understanding Machinery Appraisals

When it comes to independent valuation work, an objective opinion should have a certain degree of subjective common sense in an appraiser’s analysis and conclusions. Without it, they might be shortsighted, taking everything they see at face value without relying on their own experience to properly sift through the compilation of data and determine a realistic conclusion. This is especially true with machinery and equipment appraisers, as multiple sources about the same topic can be considered and relied upon, the sum of which will likely show a broad range of information.

There is no question that experienced appraisers with certifications and accreditations must show no bias or undue influence toward their clients and the overall scope of work. This is the fundamental foundation of the valuation industry and cannot be argued against.

That being said, an appraisal is an estimated opinion of value, and opinions are inherently subjective, regardless of the number of sources and documented information on which it is based. This is where the appraiser's experience becomes critical to the reliability of the value assessment.

The source material an appraiser researches, reviews, and relies upon will likely have gaps, flaws, inconsistencies, and broad ranges tied to the data, which they must make sense of and determine how best to correlate the information into a final conclusion.

Depending on the market activity of any given asset, these data sources might be abundant, very limited, or somewhere in between. In every instance, each piece of information should be considered and weighed.

The appraiser's job is to identify consistent patterns and potential outliers to arrive at a reliable opinion. They should ask themselves questions such as: 1) Are the available listings consistent and reasonable? 2) Are the database sources full of holes from a lack of prior sales data? 3) Are the opinions from third parties biased based on who is providing them? 4) Do industry trends focus on the specific equipment being valued?

Coming up with a logical, thoughtful conclusion of value is the ultimate goal of an appraisal expert. Going through this process is what separates established valuation experts from the rest of the pack. As a result, a degree of subjectivity will always be a component of an appraisal, regardless of the number of sources you rely upon. Consistently implementing this process across every valuation engagement is one of the most essential roles of a professional appraiser.

As a business owner, investor, or finance/leasing company, there are certain things that need to be accomplished every year in order to continue along the path of future growth and success. Each decision may require input from key employees and independent advisory collaboration to ensure the most informed opinions.

When valuation professionals are involved, they need to understand this broader transactional perspective and their specific role in it, so they can suggest the best scope of work to help move their client’s deals forward. When clients are considering engaging with a professional appraiser, ensure that their experience is commensurate with the ability to work within this broader environment.

Some of the key variables that valuation experts should discuss with their clients within the overall framework are:

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

The Appropriate Value Premises: There are potentially multiple distinct market levels of value to consider in an appraisal. Determine what the most appropriate of these is within the context of the transaction or internal decision-making process.

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 available?

Consulting Opinions: Appraisers can also provide comments on topics such as future (residual) value and remaining useful life. They may be able to consult with their clients on how the valuation work might impact the overall transaction or internal processes. Depending on the valuation professional's overall experience and background, the client might consider discussing more of the specifics of the ongoing situation to determine whether additional consulting insight is merited.

As the potential client, ensure that the valuation firm has the requisite experience needed to feel secure that their analysis and narrative report will be thorough. Less experienced appraisers can support the effort; however, avoid firms that use their junior staff to complete the research and legwork while the experienced senior manager takes only a minor review role.

Accomplishing both short-term and long-term business goals is one of the most important factors that will steer a company to its future success. Relying on the right team, including valuation experts, will ensure the best odds of realizing that success.

Depending on the industry, the equipment that works within it can be relatively mobile or stationary. The more immobile assets may involve significant costs in addition to the actual purchase price of the machinery itself. These expenses include shipping, installation, project management, engineering, electrical, plumbing, and operator training. These extra investments are necessary to get the equipment up and running. For mobile assets, these variables will be much less of a factor in a potential transaction.

From an appraisal perspective, this creates the need to further define Fair Market Value beyond just the “hard” costs. Fortunately, the American Society of Appraisers (ASA) has developed definitions to consider these potential scenarios. Two of the most common are Fair Market Value-Installed and Fair Market Value-Removed. With each definition, it takes the initial premise of value and expands upon it to further clarify its parameters.

For comparison, here are the definitions as stated by the ASA:

Fair Market Value

Fair Market Value is an opinion expressed in terms of money, at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell, and both having reasonable knowledge of relevant facts, as of a specific date.

Fair Market Value-Removed

Fair Market Value-Removed is an opinion expressed in terms of money, at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell, and both having reasonable knowledge of relevant facts, considering removal of the property to another location, as of a specific date.

Fair Market Value-Installed

Fair Market Value-Installed is an opinion expressed in terms of money, at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell, and both having reasonable knowledge of relevant facts, independent of earnings generated by the business in which the property is or will be installed, of a specific date.

The bolded words within the refined definitions provide additional perspective based on two different scenarios. For mobile assets, these values will not be much different, if at all; however, for certain types of manufacturing and processing equipment, for example, it may be significant.

If the appraiser is valuing an over-the-road truck or trailer, they would just use the premise of Fair Market Value, as installation and removal costs would not be material.

However, for a large multi-component material handling line in a processing facility, the value on an installed basis will likely be significantly higher than the removal cost. The requirements necessary to ship these types of assets, add extra foundations to install them safely, all utility line hookups needed, and potentially paying the manufacturer reps for weeks of on-site training, are some of these costs that would have value on an installed basis but not in a removed situation.

In summary, it is important for both the appraiser and the client to determine the most appropriate definition of value to use in any given situation. Communicating the purpose of the appraisal and discussing the big-picture perspective, along with the owner/buyer/lender/investor’s goals, will help determine which approach makes sense.

When equipment appraisers rely on the Cost Approach, two of the key factors considered are useful life and depreciation. Though the process may seem straightforward, you would be surprised at how many differing opinions professionals have in these areas.

Independent Valuation is Not the Same as Accounting Methodology

When it comes to capitalized machinery and equipment on a company's books, accountants treat depreciation and useful life according to accepted principles. One such principle is the Modified Accelerated Cost Recovery System (MACRS). This method is based on a straight-line reduction in value, starting with the equipment's acquisition price and amortizing it equally over a standardized term, usually 5 to 7 years. The depreciation endpoint is typically zero. The goal of many businesses is to expense as much as possible in the early years of an asset's life through annual depreciation for tax-deductible purposes, while improving cash flow and liquidity.

When appraisers value machinery and equipment, they research market and industry data to identify a reasonable number of sources to assist in estimating value. They also fall back on their experience appraising similar assets in the past. Depreciation and useful life are two components of the analysis under the Cost Approach. The goal of the overall process is to understand best how equipment is valued over time and how long it can reasonably be expected to operate effectively before needing major rebuilds/overhauls or retiring from service entirely.

It is important to understand these factors and take them into account as part of a complete appraisal analysis, which will also include reviewing comparable sales of the equipment being appraised. Market-comparable data can often be limited or inconsistent across sources; therefore, a balanced understanding of depreciation and useful life will further support the analysis and provide reasonableness checks for any comparable sales or resale opinions they may gather or have experience with.

Developing Market Depreciation Curves for Asset Classes of Machinery and Equipment

Once an appraiser has completed several valuations in similar markets and industries, they might consider creating a database of values, which results in the development of market-driven depreciation curves that will further serve as a reasonable source of historical data for future valuations. This would be similar to the concept of subscription databases that are publicly available in certain markets, such as construction, automotive, and over-the-road transportation, in today's resource networks.

In summary, when an accredited, experienced valuation professional works on an appraisal assignment, it is important to understand and develop opinions regarding the useful life and levels of annual depreciation of machinery and equipment.

Every business owner will eventually reach a point where they begin planning their exit strategy because they are nearing retirement or want to move on to something new. Equipment appraisers in this position are no different and should think about the best way to maximize return while determining the most appropriate course of action.

Transitioning ownership and leadership can be an intimidating process. Current owners want to preserve the company’s reputation, relationships, and systems that make it valuable. In the equipment appraisal industry, credibility, experience, accreditations, and client trust must be maintained. An unplanned exit can create uncertainty that could potentially erode all the goodwill you’ve spent years creating.

To begin planning, define what “success” looks like for you. Do you want to sell the business to another appraiser or transition ownership to a partner or key employee? You may want to gradually wind down operations while maintaining a client base part-time or merge with another practice to scale up before exiting.

The clearer your objectives, the easier it will be to structure a plan that meets both financial and personal needs.

Potential buyers will look at historic revenue and profitability. They will also consider the level of recurring clients, referral relationships, accredited appraisers on staff, established procedures, report templates, professional reputation, online presence, and marketing, billing, and compliance practices.

A formal valuation of the business may also take place.

If you’re grooming an internal successor, such as a partner, family member, or senior appraiser, start early. Knowledge transfer in appraisal work takes time, and professional credentials often require years of experience and coursework. Mentoring your successor in client management while gradually shifting responsibilities can create a seamless transition that reassures clients and maintains business continuity.

Most successful exits are planned three to five years in advance. This allows time to improve financials, strengthen client relationships, and prepare the successor. When the time comes, communicate your plan to employees and major clients with clarity and confidence.

Work with your accountant, financial, and legal advisors, who will help structure the transition, minimize taxes, and ensure the deal terms align with your long-term goals.

In summary, a well-designed exit strategy gives you control, peace of mind, and a lasting legacy. Whether your goal is a sale, succession, or gradual retirement, thoughtful planning ensures your equipment appraisal firm continues to deliver trusted value long after you’ve stepped away.