Equipment Appraisal Blog | Understanding Machinery Appraisals

There are times when used equipment dealers and resellers are asked to provide estimated values for the types of machinery they sell. Alternately, independent equipment appraisers have clients who wish to market their assets for sale, while asking the appraiser if they have experience liquidating the M&E they value. There are both similarities and differences between independent machinery & equipment appraisers and used equipment resellers, which creates a fine line between the two that should never be crossed.

When researching market values, equipment appraisers will contact used machinery dealers in the relevant industry, such as earthmoving, truck transportation, or parts manufacturing, to name a few. These vendors can provide insightful data to the appraiser, specific to the makes and model types they sell, which becomes one of several sources relied upon during the valuation analysis.

Equipment dealers often provide their clients with estimates of value prior to engaging in a resale effort, to assure them of their experience and to manage expectations for the eventual prices realized at sale. Both appraisers and resellers are continually crossing paths in the used equipment marketplace, even though their primary focus is quite different.

Here are some other distinctions to consider:

An accredited appraisal is an independent, unbiased opinion of value based on a blend of approaches and methodologies which, in part, consider the opinions of certain used equipment dealers. An experienced equipment appraiser will consider multiple sources before ultimately concluding on a value opinion.

This opinion is not a guarantee of a sale price outcome and the information they receive from equipment dealers will be subjectively weighed, depending on the rest of the information they gather. Equipment appraisers typically have a broad degree of experience in many distinct markets and industries, directly tied to their client’s businesses.

A used equipment dealer, on the other hand, will usually focus on a particular market, and more specifically, certain makes and models of machinery with which they have built their support and credibility over the years. These dealers will have a significant amount of expertise in these more refined areas but their primary goal is in the sale of equipment. While they understand value as a result of this experience, they are not considered independent or accredited appraisers. There may even be some level of bias in their opinions, given their ma objective is to sell, not appraise.

In summary, appraisers and used equipment resellers are quite different in their overall skill sets, however, the markets they work in often overlap. It’s prudent to understand the distinctions of each, so you can create the most beneficial team around you when it is time to consider buying, selling, or financing your machinery & equipment.

Many businesses rely on the use of heavy equipment to produce the products and services they sell, such as earthmoving, truck transportation, building construction, and all types of utilities, energy, and manufacturing companies.

In certain instances, the value of the machinery is the most significant component of the balance sheet, and can even be greater than the annual revenue of the business. If you own or are considering investing in a company with this type of profile, understanding the current market value of these underlying assets is as important as reviewing historic and forecasted financial statements.

To effectively measure the overall value of a business, one should consider breaking it down by the prominent asset types, both tangible and intangible, which translates to the need for an independent appraisal for each of these areas.

It would be careless to rely on the company's internal accounting records and policies to measure the value of their machinery & equipment, as they generally utilize accelerated depreciation rates to amortize the capitalized cost as quickly as possible.

If the company has a high content of expensive, long-lived machinery & equipment with an average age of over 5 years, there is every chance that the market value of these assets is much higher than the net book value recorded by their accountants. This variance can be monumental, even for small businesses with lesser sales volume.

For example, a company with $20,000,000 of capitalized machinery and equipment could effectively depreciate the entire cost over 5 years, realizing a net book value of $0 after 60 months. If these assets are used in manufacturing or construction, the likelihood is they will have a normal useful life range between 10-20 years, as long as they are well maintained.

Based on this generic scenario, it’s not unreasonable to estimate the market value of these assets to be $10,000,000 or higher, if the equipment is still relatively young, and in good operating condition. The appraised value of the company’s equipment would then be utilized as a part of the overall business valuation, instead of $0. One might say that is a difference worth determining!

Whether your targeted company is heavily reliant on tangible machinery equipment or not, it is always a prudent decision to obtain an updated Fair Market Value appraisal for these assets to effectively measure their true worth

A lot of people have probably heard the title phrase spoken informally when discussing the value of their truck, car, or piece of equipment. Possibly when they are seeking financing for the sale of used machinery or negotiating with a potential buyer or seller.

Is there any truth or logic behind this statement? That depends on if you are an equipment dealer, an appraiser, or a casual used machinery investor.

I heard a professional speaking to a group the other day about selling equipment in a very “down” market, where the industry was being perceived as potentially dead or dying. The equipment associated with this industry was being sold for pennies on the dollar during this period, by those in desperate need of turning the assets into cash. The machinery was fully operational and had years of useful life remaining.

On the flip side, is a 15-year-old truck-tractor with 1,000,000 miles worth 90% of what a brand new one would cost today? If you look at trade journals in the current marketplace, you will see these inflated asking prices as sellers try and take advantage of an unprecedented world economy we are in the midst of today.

From this appraiser’s perspective, these types of sales should be considered outliers to any reasonable, common sense comparable sales approach to valuing similar assets. If a business owner or investor is not willing to take a broader look at the market or industry they are working in, through impatience or necessity, then how they react in these situations cannot measure the true value of their underlying machinery.

Even the most cyclical, volatile markets will reveal a historic pattern over time that will likely continue over decades to come, regardless of what the doom and gloom prognosticators will try to tell you. Yes, there will be assets bought and sold at the peak and nadir of these cycles, however, any and all of these should be adjusted to truly measure the realistic value of machinery & equipment.

The sales comparable approach can sometimes lead an appraiser down a misleading path when used exclusively, and without consideration for ignoring sales that fall well outside of a long developed pattern, and in consideration of very unusual market behavior. As a complement to this data, take a realistic look at how these assets have generally depreciated in the marketplace in years past, based on their age, useful life, maintenance, and selling cycles in an adjusted, normalized market.

I am not saying these cyclical conditions should be completely ignored, but instead considerably tempered when distinguishing what an asset is truly worth vs. what someone is willing to pay for it in unique circumstances. How the appraiser subjectively weighs all of this information to formulate their opinions of value will vary, however, those who take the time to look at multiple perspectives will be able to bring sense to an otherwise unusual scenario.

As many are witnessing significant increases in residential and commercial real estate market prices and rental rates, due to the economic issues facing the country, the used machinery & equipment sales have experienced similar price adjustments. While appraisers and resellers can research and support these inflated prices based on actual sales, many banks and financial services companies are taking a more conservative approach when it comes to lending practices.

Still stinging from prior market “bubbles” which ultimately popped and led to significant defaults and write-offs in past decades, these equipment and real property borrowing sources are taking a more conservative approach when approving loans and investments using these assets as collateral.

Even before this most recent wave of used property value spikes, lenders would typically approve based on 60-80% of fair market value or 80-100% of an orderly type of liquidation value. This was considered normal business practice and for the most part, continues today. The biggest change we are seeing now is they are not taking every appraisal at face value with an understanding that current market conditions are in certain cases, unprecedented, with price increases at a dramatically high level.

Lending institutions are looking back at previous market levels for similar properties and equipment, and attempting to support a more reasonable value that will hold up over the long term. The biggest concern to owners and buyers looking to borrow or refinance is the lower level of funds approved, requiring a larger out-of-pocket cash down payment on the assets.

It is prudent to keep this information in mind as you look to acquire used machinery & equipment over the next year. While you may have no choice about the price you’re paying for these assets, the lending markets are becoming savvier in their approval practices, which will require more flexibility when settling up with sellers. If possible, try to keep an extra amount of cash on hand available to fill in the gaps.

Whether you work at a conventional bank, leasing company, investment house, or private equity firm, there are several options when it comes to mitigating the risk involved with short and long-term lending. The phrase "collateral" can mean any number of different types of assets that the targeted business has available to pledge as security in a transaction. Depending on the type of company doing the lending or investing, they will identify and independently value the collateral as part of the deal structure.

The following assets are considered the most common collateral:

Tangible Asset Types:

Real Property - Buildings, land, improvements, and certain fixtures

Machinery & Equipment - Typically applied to commercial and industrial business-owned assets. Common examples are construction equipment, trucks, trailers, and machine shops.

Personal Property - Typically identified for individuals and residential properties. Common examples are cash, furniture, household goods, jewelry, and artwork.

Intangible Asset Types: Stocks, bonds, business goodwill, patents, trademarks, customer lists/relationships, established websites, domain names, intellectual property, and trademarks.

From the perspective of conventional banks and leasing companies, tangible assets drive the collateral value assessment when working with businesses or individuals that own a significant amount of real estate and equipment. These organizations understand the overall company value is significantly higher than the sum of the tangible property, however, the ability to “touch and feel” the assets which secure their investment loans and leases brings a higher comfort level.

They are generally in for the long haul with their clients, sticking with them for several years while looking to provide competitive interest rates.

Investment houses, private equity firms, and similar institutions typically take a shorter-term look at the business which creates an opportunity to consider intangible as well as tangible assets when approving and collateralizing transactions. Simply put, overall business value, which combines every asset type into the appraisal equation, is a useful tool for these investors to assess their risk level.

This strategy is logical given the low probability that a significant change in the business will occur when viewing it from a 12-24 month perspective vs. the longer-term bank and leasing company directives.

In summary, collateral is a key component of virtually every investment transaction in the marketplace. Determining the types of assets which will secure these deals depends on the risk profile each company puts into practice. When considering utilizing these types of financial institutions and investment firms, ensure you understand these factors before committing to a business partner.