Equipment Appraisal Blog | Understanding Machinery Appraisals

Have you ever driven by an abandoned facility or work site and seen equipment that looks like it has been sitting there for months or even years, neglected and exposed to the elements? You can tell just from a casual view that the machinery is in dire need of major repair work or is otherwise headed to the junkyard.

This may be an extreme and broad example of how the value of equipment can be greatly affected by lack of maintenance, however, from an appraiser’s perspective, the history of an asset’s operation and care is a critical component to supporting value.

Most accredited and certified appraisers are not mechanics or technicians, and therefore cannot independently assess the cost of bringing equipment back into good operable condition. Therefore, an assumption is typically made stating that the associated values assume normal conditions exist, or they receive details from the owner or a qualified third party stating otherwise.

Even when a general visual inspection is part of the valuation effort, it is assumed that normal operating conditions exist, and effective maintenance history has been completed over the life of the assets unless the appraiser is told otherwise. If it is evident during the inspection that the assets have been out of service for an extended period and need repair work, the appraiser can apply a reasonable penalty to account for this, however, without support of the specific circumstances, the adjustment will be very broad in nature.

The fact is that in any situation, the appraised value is heavily predicated on the assumption that a potential buyer will be able to operate the equipment with minimal to no reinvestment once ownership changes hands. If the appraiser knows this is not a correct assumption, then they must determine a way to account for this that can be supported by their experience or ideally with a qualified assessment of repair costs.

Poor maintenance practices and long-term lack of use will eventually lead to a shortened life and significant repair costs for virtually all types of equipment, vehicles, and even certain personal property. If you own these types of assets and you know they will be out of service for an extended period, it is important to store them in a protected environment and keep the components running once a week or so to maintain them properly. This way, when it comes time to use them again or sell them on the open market, you can rest assured they will function reliably for you or your buyer.

Many experienced and credentialed appraisers augment their services as expert witnesses in litigation matters such as prolonged business disputes and personal divorce cases. Working with clients and their attorneys leading up to a possible trial is common practice for valuation firms; however, these cases are often settled before testimony is required.

If the litigation does reach trial or arbitration, there is the likelihood that testimony will occur either during the trial or before, in a deposition format. As an expert witness, before the pandemic, it was generally a requirement to attend these hearings in person, which involved additional time and costs for travel and sitting in court waiting to testify.

Over the last 2+ years, there has been an abundance of “catch-up” work by the courts and attorneys given the delays in advancing cases during the pandemic. As a result, a high number of valuation assignments associated with these cases have moved to deposition or trial, creating an increased level of requests for expert witness testimony.

Fortunately, the opportunity to testify remotely online has allowed appraisers to avoid spending inordinate amounts of time traveling around the country to attend these in person and then having to sit idly waiting for their turn to appear as a witness.

One of the few silver linings associated with the pandemic was the widespread acceptance of a remote work model, which includes a significant amount of communication handled through an online format, such as Zoom or Microsoft Teams. This has now become commonplace for expert witness testimony and, as a result, has allowed appraisers to provide this service more affordably to their clients.

Based on my own recent experience, this process has by and large been successful, and the likelihood of creating a more permanent change to include remote testimony options at trial and deposition will continue to develop in the long term.

Like many other industries, technological advances over the last 15-20 years have played a significant role in creating efficiencies for appraisers to manage their workload and grow their businesses to new levels without spending a lot of additional time and expense to accomplish this. The opportunity created by remote expert witness testimony is one of these critical areas of advancement, and appraisers should take advantage of this as much as possible.

Small businesses have many fixed expenses associated with running the day-to-day operation. If that isn’t enough, there are always “one-off” costs that may be foreseen or unplanned during the year that the company needs to account for. Fees for business or equipment appraisals will fall into the latter category; however, when those costs are compared with the benefits you gain with an updated valuation, you should not hesitate to pull the trigger.

Generally speaking, appraisal services are designed to assist in facilitating the closing of a larger business transaction or are utilized in the settlement of a dispute. Here are a few specific examples:

Bank Financing and Leasing

The traditional process of working with banks, leasing companies, and similar financial institutions will require a review of your company’s assets to collateralize and secure a loan or lease.

Private Equity Investment

A secondary source of capital for your business in the form of private investment will allow your business to expand its resources and promote growth.

Buying and Selling

If you’re considering buying or selling a business, you will want to consider an appraisal to confirm your assumptions about the value of the underlying assets. Successfully negotiating a sale is the goal and having a third-party valuation will assist in the process.

Similar to a personal divorce, partners may eventually fall out of favor with one another, and separation becomes inevitable. An updated business valuation will bring more clarity to the negotiation of a fair buyout settlement.

The residual benefits of an appraisal include the use of the report for accounting, tax, and insurance purposes. A recent valuation may come in handy for a variety of reasons. Just ensure the original purpose of the report does not conflict with any future use as appraisals are generally designed for specific situations and may need to be amended if used for something different.

Like many jobs, a combination of educational qualifications and hands-on experience should create the most reliable professionals who can be trusted to be efficient and effective in their work. Whether you have trade or manufacturing skills, are in retail sales, or provide consulting services, the more schooling, training, and on-the-job performance you have, the more accomplished you will become.

Appraisal work falls into the service provider category, and in addition to these qualifications, requires a high level of ethical understanding and impartiality to create value-added for their clients. With the focus on these requirements, the educational component for an appraiser is not learned in high school, undergraduate, or graduate school, but is part of an overall technical training program provided by reputable industry organizations such as the American Society of Appraisers (ASA) and the National Association of Certified Valuators and Analysts (NACVA).

Although many appraisal companies are affiliated with these types of organizations, it is incumbent upon the individuals within each business to personally acquire the educational training and credentials they offer. Once the initial certifications or accreditations are granted, there are continuing educational requirements to maintain them over one’s career.

From an experience perspective, the highest-level credentials are generally not earned until 3-5 years after an individual begins working as an appraiser. If less experienced employees are involved in a valuation project, the final reports submitted to clients should have a signed certification from the senior appraiser who would be responsible for the results of that assignment.

If you need an independent appraisal, it is important to ask the companies you are considering exactly how the assignment will be handled. Ensure that a senior-level valuation professional will be managing the project and directly involved throughout the process. Without the proper credentials and experience behind the work effort, you may end up with a less than reliable report.

Education, training, and experience are the keys to becoming adept at most things in life. The appraisal industry is no exception. To learn more, contact a reputable valuation professional who can provide additional insight on the topic.

The need to have an independent machinery and equipment (M&E) appraisal completed for your business can arise from any number of circumstances. The most common reasons are for collateral review with bank financing and leasing, merger and acquisition, purchase or sale, estate planning or settlement, divorces and business disputes, insurance, accounting, and tax requirements.

In all of these instances, Fair Market Value is estimated and deemed appropriate to rely upon; however, there may be reasons to consider lower-value premises such as Orderly and Forced Liquidation (Auction). Many finance companies and investors, as well as those not used to buying and selling equipment for a living, like to understand these lower-tier value levels given the likelihood they may not realize Fair Market Value in a real-world scenario.

Similar to estimating Fair Market Value, the appraiser will utilize available resale market data and consider factors such as replacement cost, useful life, depreciation, and other relevant components in their methodology. There are auction databases and other sources of information that can be found when researching liquidation values. Of note, auctions can tend to have inconsistent results with their sales depending on a variety of factors that determine the level of success a particular venue may have.

Given the appraiser will most likely be estimating Fair Market Value as part of their analysis, will they want to go back to the market and start over again with a liquidation assessment? Probably not. Instead, there are a couple of options where the valuation professional can establish reasonable liquidation value estimates utilizing Fair Market Value as a starting point.

One of these is to review databases and obtain opinions from market resellers regarding the average variance between the wholesale and retail markets. Databases involving vehicles and construction equipment, as an example, include this type of analysis estimating these different levels of value.

Depending on the level of resale activity for a particular type of equipment, you will see higher or lower margins between the fair market and liquidation value. Generally, the more active the market, the less differential you will see compared with equipment in a more specialized industry.

The value level of the M&E may also play a part in establishing a reasonable differential. A $500,000 piece of equipment may have a lower percentage margin than a $5,000 asset given what a reseller would try to target for a dollar profit margin between his wholesale price and the end user price. Similar to how an appraiser establishes Fair Market Value, they seek to rely on these variables to develop a pattern that makes sense when estimating liquidation value.