Equipment Appraisal Blog | Understanding Machinery Appraisals

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.

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.