Equipment Appraisal Blog | Understanding Machinery Appraisals

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When you are considering buying, selling, investing in, or financing machinery & equipment, the age of the assets will play an important role in determining the fair market value and ultimately, the price you are willing to pay or accept for it.

Useful Life

The useful life of equipment is generally considered just a guideline that estimates when the asset would need to either retire from service or need refurbishing and reinvestment to prolong its life. Many factors can affect this estimate such as usage, maintenance, technology, and overall manufacturing quality.

Chronological Age

The chronological age of machinery & equipment is simply calculated from the date of its original manufacturing to the effective date you are considering, usually a current date. So, as an example, if a used Caterpillar excavator was originally built in 2011 and you want to purchase it today, the chronological age of that asset would be 10 years.

Effective Age

Using that same example, over the 10 year period from 2011-2021, the specific Caterpillar excavator you’re looking to purchase, sell or finance, will have a certain number of hours logged, will have a specific prior sales history (1 owner or multiple), been under a good or not so good maintenance program each year and possibly had certain major components replaced over that time.

All of these factors will play a part in considering an adjustment to the chronological age which would create a more realistic effective age.

If the excavator was only used 1,000 hours per year, that might be construed as half or even less than normal usage, while being maintained on a daily basis. On the flip side, if the machine had over 20,000 hours on it with no component replacements over the 10 year period, you would take a hard look at what would need to be invested into it to bring the machine into good operating condition and extend its life.

In many industries, you will see certain types of equipment originally manufactured decades ago while still in good operating condition. These machines have likely not been affected by changes in technology and have been well maintained with component parts replaced as needed over their lifetime.

There are also plenty of examples of machinery in heavy usage environments such as mining and aggregate, that well exceed normal operating hours which could have an adverse effect on value. However, as long as these machines are well maintained with components replaced as needed, these assets are durably built and designed to last a long time.

In summary, effective age is an important component to understanding machinery & equipment value. While it is a subjective estimate based on a number of variables, it provides a working guideline to appraising and ultimately understanding what you should be buying and selling these assets for at any given time.

Regardless of the industry you work in or the business you own, there will likely come a time when you need to obtain an updated equipment appraisal as you continue to transact in the marketplace. Whatever future plans you have for your business, it is very likely that an appraisal of your capital assets will be beneficial to the process, and possibly even a requirement.

Here a few of the most common reasons why an updated equipment appraisal will be a valuable resource for you:

Bank Financing & Leasing

The most common instance where an appraisal is beneficial and required by all the parties involved occurs when you look to raise capital to maintain and grow your business. The traditional process is working with banks, leasing companies, and similar financial institutions who will require a review of the company’s assets.

If your business requires machinery & equipment to effectively operate, as most manufacturers and service providers do, an updated appraisal will support the current value of your machinery as part of the loan approval process. These assets may end up being the primary collateral the finance company needs for you to successfully secure the loan you need.

Private Equity Investment

A secondary source your business may need to secure capital is in the form of private investment, in the form of equity, which will allow your business to expand its resources and promote growth.

These investors may want to acquire a stake in your business before laying out cash, which will need to be supported by a valuation of your company and the underlying capital assets. Machinery & equipment items generally support a long useful life which will translate to value retention over time and therefore, these assets will comprise a significant component to the overall business value.

Buying & Selling

If you’re considering buying or selling a business, or distinct machinery & equipment as part of a larger transaction, you will want to consider an appraisal to confirm your assumptions about the value of these assets. The time and tension involved in successfully negotiating a sale is significant enough to have a third-party experienced appraiser provide you with the assurance that your pricing strategies are supported and credible.

Tax, Accounting & Insurance Compliance

Tax, accounting and insurance requirements are numerous when it comes to maintaining compliance with all of these facets of your operation.

Tax assessments and regulations, accounting standards guidelines for capitalizing and depreciating your equipment, and adequate insurance coverage are just some of the boxes you need to check in these important areas. Routinely communicate with your accountants and agents to ensure you are up to date on these requirements and see if an equipment valuation might benefit the process, both long and short term.

In summary, your company’s revenue and income typically fluctuate over time depending on the markets and industries you operate in however, the value of your machinery & equipment will likely remain steady through these periods. Understanding the current value of your machinery & equipment by hiring an accredited, experienced appraiser will benefit your business across multiple fronts and provide you with peace of mind as you go forward into the future.

When you are looking to find an equipment appraiser who can provide a high-quality level of service, how do you know who to select? These types of valuation firms provide tangible personal property and machinery & equipment appraisal services to businesses and individuals across a broad range of markets and industries. The best of these are experienced, reliable, and communicative, while able to support their methodologies and conclusions should the need arise in any business transaction or dispute.

Here's a look at how equipment appraisal firms operate and what is required to be considered a reliable and credible business:

How Equipment Appraisal Firms Operate

Though many companies and individuals purport to be qualified equipment appraisers, only those that have gone through the proper training and education while developing a high level of experience over time can properly call themselves one. Commonly called M&E (machinery and equipment) appraisers, these companies should be able to accurately value virtually any tangible piece of property that would not be considered real estate (land and buildings).

High-quality M&E appraisers have a strong understanding of the variety of situations where appraisal services are required, including litigation, finance and leasing, tax appeals, risk management, insurance, buy/sell, merger & acquisition (M&A), accounting, donations, and any other situation. When that understanding is combined with their accredited expertise you have found a firm well worth your consideration.

Independence and Lack of Bias

Why is hiring an M&E appraisal firm a better choice than engaging a company that performs appraisals as part of a dealership, auction company, or similar business where sales is also a component of the operation?

One of the biggest factors to take into consideration is complete independence of anything else that may be going on in the overall business transaction for which the appraisal is needed. An independent machinery & equipment valuation firm should perform appraisal work and nothing more. If the company you hire is also involved in buying and selling equipment or investing in businesses that do so, they will potentially have a secondary agenda that would create some bias and lack of independence in estimating value.

Proper Education, Experience, and Accreditation

Highly qualified appraisers go through a rigorous process of education and testing while being required to have a minimum level of experience before they can be called an accredited M&E appraiser. This ensures they will use the appropriate methodologies and techniques when appraising your machinery & equipment. The most highly recognized organization that provides this level of training is the American Society of Appraisers (ASA). Other, more specialized groups also have educational and training requirements that can provide some of this experience, however, the ASA accreditation is the most highly sought-after title for any true appraiser.

Should the need arise where the appraisal report may be reviewed or entered into court in support of a business dispute, this accreditation will be an important qualification as well as the overall experience of the appraiser.

In summary, Equipment Appraisal Services hires only ASA accredited valuers as part of our organization. We look forward to speaking with you further when the need arises to have an independent tangible personal property or M&E appraisal completed for your business.

Someone once advised me that when you're in the restaurant business, change is inevitable. This was originally intended to mean the frequent need to shift suppliers, update your menu, and constantly train staff, among other things. Today it means a whole lot more than that, with the goal of survival and long-term profitability at the forefront for many restaurant owners due to the COVID pandemic. Kitchen, dining, and bar equipment, commonly referred to as FF&E (furniture, fixtures, and equipment) can assist restaurant owners with obtaining new capital, restructuring loans, and help expand a growing business.

A restaurant FF&E appraisal will support the value needed for these situations

Restaurant appraisals are commonly requested by banks and other lending institutions for owners, potential buyers and sellers when assessing loan amounts or restructuring existing debt. The value of your overall restaurant business probably has a small amount of that value on the books associated with the FF&E. As long as your equipment has been well maintained and is in good condition, an updated appraisal will most likely support an increase to the tangible asset component of your operation, and will, in turn, increase the overall value of your restaurant.

Leveraging these assets in conjunction with the value of your intangible goodwill can maximize the amount of capital you may be able to borrow in any of these financial situations.

When you are ready to get an FF&E appraisal for your restaurant, always seek out an experienced, accredited equipment appraiser, as their credibility, and that of the valuation firm they represent, goes a long way to supporting the concluded values estimated in the report. Most banks and lending institutions will require a fully documented and researched analysis as part of the valuation effort.

You can ask the appraiser to quote the work either as a visual on-site inspection or as a “desktop” appraisal depending on the level of data you have available for review and your cost budget. You should request the valuation be under a Fair Market Value premise, assuming the restaurant remains in operation, and potentially a more conservative orderly liquidation value if the bank is looking for a “best case, worst case” scenario.

By having a restaurant equipment appraisal performed on your associated FF&E, you can also better determine the overall value of your business if you decide to sell.

When you are ready to move forward on an appraisal of your restaurant FF&E, contact us at Equipment Appraisal Services. Our fully accredited and experienced appraisers are well prepared to provide you with everything you need.

Your oilfield machinery is a primary driver behind the success of your business. You haven’t considered how much your assets are worth in quite some time, however, you now need to update your insurance coverage, obtain refinancing, buy or sell some equipment or even purchase a new company to keep up with growth requirements. Understanding the current market value of your oil and gas equipment is critical for all these possibilities. Obtaining an independent valuation from an experienced accredited appraiser is equally important to you and the other parties involved in the transaction.

Factors Considered in a Fair Market Value of Oil and Gas Equipment

• Physical Deterioration: An appraiser will review the equipment, taking note of its physical condition. The old adage about never judging a book by its cover applies well to machinery appraisals for oilfield equipment. Even if an oil rig looks old and shows visible wear and tear, it is not necessarily an indication of low value. Appraisers will review the history of the equipment with you before making a value determination. Machinery that has been well maintained, with components replaced as needed, regardless of age, will likely still have significant value.
• Replacement Cost: An appraiser will estimate how much it would cost to purchase, for example, an equivalent rig, mud pump, or service truck new, and then deduct from this cost-based typical levels of market depreciation over time.
• Useful life: The appraiser may estimate the useful life of the machinery by reviewing the age, physical condition, and depreciation of equipment. Effective age is typically weighed more than chronological age if the equipment has been well maintained over its life.
• Market Data: The marketplace is where all relevant information is found during the appraisal process. We will look at recent sales and listings while gathering opinions of value from third parties who buy and sell new and used equipment every day.

Appraisers will factor all of these variables into the analysis and subjectively estimate value based on their opinion of the reliability of the data. The appraisal report will summarize this process, explain the criteria under which fair market value was determined, and provide the sources relied upon to support these conclusions.

If you are considering any business plans in the immediate or longer-term future where the value of your oilfield assets is a factor in the decision making, it is well worth the time and expense to engage an independent appraisal company to complete the task. It is important to hire an appraiser who is unbiased and experienced in the valuation of these types of assets. When your business is on the line, never settle for an appraiser who doesn’t have the right credentials or may have an interest beyond appraising your machinery. Equipment Appraisal Services is the perfect place to begin your search.