Equipment Appraisal Blog | Understanding Machinery Appraisals

After almost 40 years of working in the machinery and equipment markets, I find it fascinating how so much has changed but many things remain the same. Whether it involves financing and leasing, asset management, buying and selling, or independent valuation, the methodologies and mechanics of these industry sectors working together to be successful have been consistent for decades.

From an appraisal perspective, you don’t need to be an expert in any one type of market or industry to estimate value effectively. The principles and methodologies learned and practiced within the M&E appraisal profession do not change as the asset types vary. Gaining experience and developing a sound and supportable technique for appraising is the key to becoming a well-regarded appraiser.

Here are a couple of topics to think about that might help you along the way as you continue to develop your valuation skills and expertise:

Initial Information Gathering:

Obtaining the details behind the equipment you are appraising is a critical first step in providing a credible appraisal. Variables such as the year, make, model, serial number/VIN, hours/mileage, original cost, and any relevant specifications and documentation are all important to obtain. Communicate with the current owner to gain a basic understanding of the history of the machinery and gather any detailed itemized listings and support data that might be available.

Gather a Broad List of Sources

During the research process, try not to put too much weight on any one source when it comes to estimating value. Multiple perspectives from varied market sources can provide you with a balanced amount of information that you can review to ultimately form your own opinion. Remember that this is your appraisal, not simply a parroted version of someone else’s.

Don’t Rely on One Approach

From my experience, it is beneficial to consider and weigh the appraisal from both the Cost Approach and Sales Comparison Approach. Regardless of how much resale data might be available for any piece of equipment, it is also beneficial to understand the new replacement cost, useful life, and typical market levels of depreciation and obsolescence that occur with machinery and equipment. Combining the elements of both approaches can create a check and balance type system for your analysis and provide a sanity check to all the data gathered.

Like anything else in life, experience is gained by doing, and each year you can continue to hone your skills to become a better equipment appraiser.

We see many instances where business owners and individuals no longer need to operate used machinery or have recently acquired older equipment and personal property as part of a larger purchase or estate settlement. In any of these cases, the assets are no longer useful, and there becomes a need to decide the best option for transferring ownership.

The first thought is usually determining the ability to sell or liquidate the assets; however, this process may be difficult, especially if demand is limited or the owner is unfamiliar with the potential resale markets. As an alternative, donating the property to a local business, university, training school, or non-profit organization might be a better choice. The benefits of a tax deduction and supporting your community or alma mater might outweigh the uncertainty and time-consuming process of trying to sell the items on your own.

Before you decide which options are best, it is a good idea to consult with your accountant as well as an accredited professional appraiser, especially if you know the total value of the donation will be significant. The IRS rule is that an independent appraisal is required as part of any deduction claim in excess of $5,000. You must also include Form 8283 as part of your income tax filing. The form needs to be signed by you, the appraiser, and the party you are donating to.

The cost of the appraisal can sometimes become a challenge in comparison to the tax benefit. For example, suppose you have dozens of small items that are being donated together, and all need to be appraised. In that case, the total value might not support the cost given the valuation process will be time-consuming. You need to broadly calculate your expected tax deduction by approximating the total value of your donation and multiplying it by your estimated adjusted income tax percentage.

As an example, a $50,000 donation would result in a $10,000 deduction for someone in the 20% tax bracket. If the appraisal costs $5,000, you will end up with a $5,000 overall benefit for the donation. A lower overall value for your donation will create a more price-sensitive situation regarding the appraisal cost, and vice versa.

It is important to review and discuss these scenarios with your accountant and the appraiser to try and create an affordable option that makes sense for you. Grouping together some of the less expensive items for the purpose of valuing them might be one viable way to save on the time and cost of completing the appraisal. The focus can then be placed on the higher-valued property for the purpose of detailing and itemizing the report.

One of the most common misconceptions in the world of machinery and equipment (M&E) valuation is that desktop appraisals are not as reliable as those that include an on-site field visit. There is no difference in the credibility or supportability between the two, as long as the steps taken to obtain sufficient detailed asset data are completed properly.

The fact is that the vast majority of M&E appraisals are conducted as desktops. From my own experience, 75-85% of projects do not include a personal visual inspection of the equipment. I would bet those statistics are fairly consistent across the industry with my competitors.

There are a number of reasons why this occurs. Here are the most common:

• Cost to the Client: On-site appraisals require additional time and expense for the appraiser to complete, which naturally dictates higher fee quotes. In some cases, it can be twice as much or more than a desktop option. Ability to Obtain Sufficient Detailed Data from the Client: Using today’s advanced technology, along with effective communications, it is much more efficient to obtain the needed information without putting undue burden on the client.
• Low Transaction Size and/or Number of Assets Involved: It may simply not make economic sense relative to the size of a deal or if only a handful of items are involved.
• Condition Assumptions: Appraisers typically assume normal operating conditions and wear and tear when completing appraisals unless specifically told otherwise. The majority of accredited valuation professionals are not mechanics or technicians, and can only carry out a general visual verification of the equipment when in the field.
• Timing Constraints: Many appraisal projects are conducted over a short timeline where the client needs the work completed in a tight window. The majority of the appraiser’s focus should be on research, analysis, and report writing to meet deadlines.

Of course, there are times when a personal on-site visual inspection is necessary as part of the overall valuation effort. For example, the Small Business Administration (SBA) requires inspections to be completed when underwriting equipment financing transactions that are over a certain minimum threshold. In other cases, conducting the fieldwork may be the only option for obtaining the necessary asset detail required to complete the appraisal. It may also simply be the client’s preference that the appraiser come out and conduct the work personally.

To learn more about your best options when needing an M&E appraisal, reach out to an experienced, accredited professional who can take the time to discuss this topic further.

At least once a year, business owners will take stock of their current operation, while planning for the coming year, determining what changes may need to be implemented to continue on a successful track. One of these improvement areas might pertain to the sale of certain used equipment, which are now considered too old to maintain effectively or are in excess of existing production needs.

It can be challenging to take this project on alone, and fortunately, there are options you can consider that can facilitate the process. Here are a few to think about:

Sell or Trade to Your Dealer

Similar to selling your personal cars or trucks, the first place you might think of is the dealer who sold you the equipment when it was brand new. If you’re looking to replace your older assets with new models of the same manufacturer, the local dealer should provide you with trade-in options. Even if you don’t plan on buying a new machine, they may offer to purchase it outright at or near a trade-in level value. If not, they may agree to broker your used equipment through their resale networks for a reasonable commission once sold.

Listing in Online Trade Journals

There are several reputable national websites available to consider listing your used equipment with. Virtually any type of machinery or vehicle is supported by these platforms. They offer a large network of sellers the ability to list their assets with exposure to thousands of potential buyers. You can include photos, detailed specifications, asking prices, and your direct contact information with the listing. If you are not in a rush to liquidate your used equipment, you might want to consider this option as it may ultimately realize a higher resale value for a low cost.

Auctions

The auction industry continues to grow every year and provides sellers with an option that is a one-stop, fully managed effort, from the marketing, resale, pickup, and delivery of your used equipment. The booming growth of online auctions, especially post-pandemic, makes this option even more attractive, as the number of potential bidders has expanded to those who cannot physically attend the sale. The auction route has more costs and risks, given the ease of the process and more immediate outcomes. You should, therefore, research and determine the best auctioneer to work with who can mitigate these concerns for you.

An accredited independent machinery & equipment appraisal needs to rely on several variables, utilizing components of both the sales comparison and cost approach to fully flesh out a balanced estimate of value. Researching and reviewing a reasonable amount of market sources that provide useful information is paramount to effectively working through an appraisal; however, it is common that all the pieces of data won’t consistently line up or even make logical sense in some cases.

An appraiser must understand that these market sources, while very useful, might not be entirely reliable and may even have a level of bias associated with them given the business and industry they operate in. A vital role of an accredited appraiser is to sift through the information they uncover and determine how best to put the pieces together to arrive at a conclusion of value.

This is where the level of experience an appraiser has comes into play. Determining which sources appear most consistent and reasonable, as well as making some commonsense decisions on how the particular assets being valued should trade in a secondary market throughout their useful lives will shed light on the situation.

There may be times when the equipment to appraise is very uncommon, with virtually no secondary market information available to research. In other cases, the appraiser will have dozens of sources available to them, each one marketing similar machinery for sale with a wide array of differing price points. Each situation will present challenges regarding how best to work through it and arrive at a reasonable assessment.

The purpose of the appraisal and the premise of value being estimated will also create different approaches that need to be thought through while completing the analysis. How an appraiser adjusts to each situation is based on their experience and overall understanding of the bigger transactional picture they are involved in.

The conclusion of value is ultimately the appraiser’s determination and theirs alone. The sources they rely upon are not responsible nor are they the ones being compensated to provide an independent estimate.

An opinion is always going to have some degree of subjectivity behind it, regardless of how much data supports it, and that’s okay. The more knowledge and experience an appraiser has backed up by a reasonable amount of supporting data, the better the final outcome will be.