Equipment Appraisal Blog | Understanding Machinery Appraisals

When it comes to estimating the value of personal property and equipment, there are a number of premises, terms, and definitions thrown around in the professional appraisal realm, as well as areas such as insurance loss claims

Fair Market Value is the most frequently referenced when it comes to appraisers, however, insurance adjustors are tied to a less common term called Actual Cash Value.

Although you might think these two should be similar in their approach, they can be quite different, depending on the type of property being valued and the interpretation of their meaning.

As a direct comparison, here are the most often seen definitions:

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.

Actual Cash Value is the amount equal to the replacement cost (new) minus depreciation of a property at the time of loss. The actual value for which the property could be sold is always less than what it would cost to replace it.

Given there is generally room for interpretation with both of these definitions, there are times when appraisers and insurance adjustors can arrive at a very similar value and other times when there is a significant discrepancy between the two.

What approaches are utilized, and which data sources are relied upon will determine whether these values are comparable or far apart. How independent agencies measure useful life along with annual levels of depreciation, and whether they rely on direct market information or broader industry data can create any number of diverging estimates of value.

Before you select an appraiser or engage with an insurance company to protect your personal property and equipment, it is important to understand the company’s background and history with how they treat these approaches to value. Accredited appraisers have guidelines and quality controls in place by which they abide, while insurance companies will have their own internal methodologies based on past experience and actuarial data.

Regardless of these requirements, there will always be a subjective component to the concept of valuation with every business in both the appraisal and insurance industries. Seek to learn as much as you can about this topic so you can feel comfortable that the service being provided is the one that’s right for you.

Over time, business owners will need to consider investing in improvements to their facility and associated property if they have significant brick-and-mortar buildings where employees work and production is ongoing. Just like the purchase of real estate and equipment, these enhancements can be capitalized as a tangible assets and depreciated. In turn, they add value to the company’s infrastructure and can be appraised.

These investments are referred to as either leasehold or building improvements. The primary distinction between the terms is based on who the owner of the property is. If your business leases the building as a tenant with a landlord involved, then you would treat these as a leasehold improvement on your books. For internal depreciation purposes, they should be amortized over 15 years.

If your company owns the buildings and land, then the improvements are capitalized as part of the real property and treated as building assets, which are depreciated over a longer term, consistent with real property accounting rules.

From a valuation perspective, leasehold improvements can be appraised on an “in-place” or “installed” basis, since they only hold value to a building tenant while the business remains in operation. If your business relocates in the future, you cannot physically carry these assets with you to the new location.

As a result of this, in the long run, building owners reap the rewards of the improvements should their tenants vacate the premises, which can benefit their lease pricing and carry it over to a new company moving in even just a few years after the improvements were completed. Try to work with the landlord while you can, to gain some type of lease break or other benefit if you pay for these improvements.

You often see this scenario with heavy turnover businesses such as restaurants and related food services companies, as well as start-ups in tech and scientific industries. It’s a good idea to have an improvement investment concept in place, that you can show the building owner while you’re negotiating the lease terms. It’s also beneficial to work with your accountant and engage with an independent valuation firm to determine your best options as you move forward with your growth plans.

The acronym FF&E is a familiar term in the business world, especially with appraisers and accountants, however, what the initials technically stand for and what they actually encompass can vary depending on one’s interpretation and usage.

The initials represent Furniture, Fixtures & Equipment, which is broadly defined as: “movable furniture, fixtures and other equipment that have no permanent connection to a structure or building.”

Anytime you see the word “other” in a definition, it can open the door to any number of slightly different meanings. Most often you will see it referenced in businesses where there is a heavy concentration of office equipment (computers, printers, etc.) and furniture such as desks, cubicles, credenzas, and the like. That said, there is nothing wrong with using the term to generally reference all the tangible assets owned by a business that do not include buildings, land, and their associated improvements (Real Property).

There are some flaws with the term and its definition, however. For example, the term fixtures actually mean property that is literally fixed to a building or related structure, which is the opposite of the first word “movable” in the FF&E definition. An oxymoron that contributes to the diversity of applications in which the term FF&E is applied.

A second example is that for many companies, office furniture and equipment is not a significant tangible asset on their books, while the “other equipment” represents a much more substantial asset group, often separated from the term itself.

Some of the more common businesses where you will see FF&E used as an all-encompassing term are: restaurants/bars; retail stores; markets; fitness centers; corporate workplace offices; salons; and related companies, where the machinery & equipment component is complementary to the furniture, removable fixtures, and other items used every day.

A restaurant for example, will likely have as much invested in the property found in the serving and dining areas as it does in the kitchen and backrooms. Therefore, all components of the FF&E are treated similarly.

In addition, businesses who lease their buildings instead of owning them will want to include the fixtures (leasehold improvements) as part of the personal property on the books since they can be treated as an owned asset and depreciated. Using the restaurant example again, many business owners will spend a lot of money in the early stages of operation to improve and convert the property to fit the needs of their unique design and layout.

In summary, the term FF&E is commonly used in both the valuation and accounting realms. This acronym is subject to a wide variety of definitions given its nature, and there is nothing wrong with the varying ways by which it can be treated, as long as it is specifically defined by those using it.

Many businesses have been feeling the sting of unprecedented economic change since 2020 for reasons I don’t need to elaborate on. By now, we all understand the toll these past couple of years has taken on a broad range of companies, across a multitude of markets and industries. Those fortunate enough to not be overly affected by these challenges have done so by the skin of their teeth, and, therefore, the vast majority are counting their pennies a bit more closely when it comes to variable expenditures.

An unplanned variable expense you might be considering could be an appraisal, either for newly acquired or existing machinery & equipment, industrial & commercial real property, or an overall business valuation. When budgeting for expenses that are not already engrained in your company, the question may arise as to whether the benefit outweighs the cost. Is this type of expense absolutely necessary, or can your business live without it for another year or so

Some unforeseen costs are necessary but have no beneficial measurement, such as increases in overhead, like rent, insurance, and maintenance/repair costs. Others, such as asset valuation, can be weighed against the potential to save money when acquiring used equipment, or maximizing potential value in a sale or financing transaction.

When weighing these costs, it is important to consider paying a bit more for a better quality product, which will provide the best “bang for your buck,” with the benefit further supported by an experienced service provider, who won’t sacrifice quality to provide the cheapest available option.

It is always a difficult decision when entering into a relationship with any new vendor or contractor, to choose a business that not only fits with your company’s profile but can remain a long-term option, should you need to complete the process again down the road. An accredited, certified appraisal professional is one of those types of providers who will fit both your short and long-term needs, and make the expenditure easier to justify, given the overall benefit you will reap as a result.

Supporting variable costs will always be a difficult challenge facing businesses every year. Making sound decisions will come down to choosing the right partners who understand your requirements and will provide the best overall product that maximizes future benefits.

Equipment appraisers are sometimes asked which is the better source for researching used machinery market activity: current listings or public databases which reflect recent historic sales.

The answer is that both sources are very useful, and should be considered wherever possible, to create a balanced perspective when valuing machinery & equipment. Each has its pros and cons which need to be understood in order to reach the most reasonable conclusion when weighing the data. Experienced M&E appraisers know that taking any particular source of information at 100% face value, without the broader context of related data and approaches can lead to poor results.

Here are a few additional insights to consider when reviewing both used equipment listings and sales databases:

Equipment Listings for Sale

When appraisers are able to locate a significant amount of available listings for the assets they are researching, it may seem only logical that this would be the best source of information, given it is coming directly from an active secondary market. That may be true up to a point, however, you need to qualify these listings and consider only those that come from valid resellers, and are not priced out of any reasonable range of value. Even when you narrow these down in this way, you should also consider discounting the listing price to reflect what would typically be realized with a final sale. It is common practice for used equipment dealers to price their machines over fair market value, to allow room for negotiating.

Other things to consider would be location; how long the machine has been for sale; how many similar items are available; if it is refurbished and being sold with a new short-term warranty.

Machinery Sales Databases

Historic sales databases can be found either through annual subscription providers or in the public domain and can include both dealer and auction-level activity. The key thing to keep in mind with this information is that it can be based on very small samples or, on the flip side, consider too broad of a market, which in both cases can skew the results.

Some of these databases can be a good source to confirm the new cost, year, make, and model of the assets being appraised, as well as capacity specifications. Certain databases also attempt to create estimated values for the machinery over time, which is useful when forecasting future values with used equipment. That said, it is prudent to consider if the data makes sense in the context of the other sources you are researching and relying on.

In summary, both of these types of market data should be researched and considered when available to an appraiser. They should always use their judgment based on the reliability of the information, in the broader context of their experience and overall approach, to reach a reasonable conclusion of value when completing a machinery & equipment appraisal.