Equipment Appraisal Blog | Understanding Machinery Appraisals

If you're reading through a machinery valuation before bidding on a piece of used equipment at auction, you'll run across the concept of remaining useful life. By understanding remaining useful life, you can understand how much the equipment values are and purchase with confidence. Learn more. 

What is Remaining Useful Life in Equipment Appraisals?

Remaining useful life, sometimes abbreviated as RUL, refers to the amount of time in years a piece of equipment has before it will need replacement. 

To gauge the remaining useful life of an item, the appraiser will review service records, thoroughly inspect the equipment, and check out the environment where the equipment is used. A forklift that's kept in a salvage yard will age much faster than one that's always stored in a garage overnight, for example. Even if two forklifts were purchased at the same time, their remaining useful lives can widely differ. 

An equipment appraiser will consult guides that indicate equipment values over time, as well as the normal useful life of the unit, which is the typical life span of the unit. He or she may reach out to the manufacturer with questions that can help define a value if any questions arise. 

By subtracting the estimated period of use from the normal useful life, the equipment appraiser can deliver an estimate for the remaining useful life. For example, say that a canner has a normal useful life of 25 years, and the appraiser determines the equipment appears to have been used for 10 years. The canner may be older or younger than 10 years; what matters less is the physical age than the amount of use the equipment shows. The appraiser would then subtract the use from the normal useful life to arrive at an RUL of 15 years. 

How Understanding Remaining Useful Life Benefits You 

If you are interested in a piece of equipment such as a canning machine, used equipment auctions can be a great way to purchase the equipment you need at a price you can afford. Yet if you don't understand the useful life, you risk paying more than you should for an old canner that won't truly last. 

If you are the other party in the auction -- the owner of the canning machine who wants to sell it -- you also must understand the concept of useful life. By getting the equipment values taken ahead of time, you can gauge the fair market value of your item and decide your next steps. You might opt to have the old canner serviced, if a servicing can help you command a better price at auction. Or you might decide against servicing equipment, saving yourself money.  

Whether you want to buy or sell a machine, remaining useful life is an important concept to understand. A skilled equipment appraiser will know how to accurately determine the RUL and can explain it to you so you understand the estimate and can make the right decision for your business interests. While the RUL is always an estimate, not a guarantee, it's helpful to have a baseline estimate for a machine's lifespan. 

Once you know the remaining useful life of a piece of equipment you've just purchased, you can plan ahead for when the item might need to be replaced. This helps you budget accordingly for the replacement and avoid the unpleasant shock that comes with suddenly losing a piece of equipment you rely on every day. 

When you're getting a business appraisal, have you checked whether the equipment appraiser is an ASA accredited appraiser? Though it may not seem important right now, ASA accreditation can make a big difference in how well your machinery valuation holds up to scrutiny, whether it's with a bank, an insurance company or a court of law. Here are a few reasons why you should always get an ASA accredited equipment appraisals.

7 Reasons you should work with an ASA accredited appraiser

1. Standardized methodology: When an appraiser goes through the certification and accreditation process, they learn a series of standardized methodologies and the situations in which they are best applied. These methodologies have been developed over time and have been tested in legal, financial and insurance circles, proving their effectiveness in the field.
2. Holds up to scrutiny: Because standardized methodologies are being used in the appraisal, it holds up better to scrutiny in the courts, with your bank or when making a claim with your insurance company. We've all heard stories where companies lose thousands of dollars because their equipment appraisal didn't meet particular standards; with an ASA accredited appraisal, you're covered.
3. Knowledgeable about appraisal methods: Why do you need the appraisal? Appraisal practices are very different depending on why you need them. A forced liquidation will give you a much lower equipment valuation than a fair market value where you have plenty of time to move equipment without any outside influence.
4. Knowledgeable about your industry: What's the market like for your business right now? If the market is in a slump, there may be a lot of that machinery hitting the market, driving the price down. An equipment appraiser who is aware of market conditions can better factor for these issues and account for them in the appraisal.
5. Exceptional accuracy: How accurate is that machinery value you've received? Someone at your local machinery dealership may be able to give you a ballpark figure, but they're motivated by getting a sale. A certified appraiser is independent of these motivations, providing you with the most accurate possible picture of your machinery's value.
6. Experienced in appraisal: Because equipment appraisers spend all day determining equipment values, they can provide a more accurate picture of what those values are. They're not figuring out the value of just one individual piece of equipment every once in a while. They spend their entire day looking at equipment, often within a single industry. This allows them to quickly ascertain the exact value of your equipment.
7. Knowledgeable about equipment condition: Because accredited appraisers spend so much time looking at equipment, they have a very good idea of when a piece of equipment is in good condition and when it is in poor repair. This means that your equipment isn't being valued the same as broken-down machinery that isn't worth a thing.

By working with an ASA accredited appraiser, you can quickly discover the actual value of your equipment in a variety of situations. Staying on top of your equipment values will help ensure you have a more accurate picture of what your machinery assets are actually worth.

When you're buying a company, one of the last things on your mind may be equipment appraisals. What does a machinery valuation matter compared to profit and loss, equity and overall assets? If you ask any equipment appraiser, they'll tell you just how important equipment values are in your business' bottom line. Here are a few reasons why you'll want to see a machinery valuation before you sign on the dotted line.

Why do equipment appraisals matter when you're buying a company?

• They represent actual assets and equity rather than paper assets and equity. When a business is preparing its tax documents, machinery is often depreciated on a specific schedule. But in the real world, there are a wide range of factors that can impact how long the equipment can remain in service without compromising your profitability. A completely depreciated piece of equipment can continue working for years to come, while one that has had rough treatment or that is of poor quality may give up the ghost years before it would be completely depreciated on a standard schedule.
• They give you a better idea of the condition of the machinery you need to operate your new business. Part of the process can involve looking over the maintenance and repair logs giving you insight into whether the machinery has been properly maintained to deliver years of service or if it is in poor repair, which may require negotiating to a lower sale price to compensate for equipment that will need to be replaced.
• They help you plan for costly repairs or replacements down the road. An appraisal might contain the estimated normal and remaining useful lives on the equipment. This allows you to plan for these repairs or replacements long before they're needed so you can have the financial resources in place that will be needed.
• Equipment appraisals can also be completed at the "Replacement Cost New" level which would give you insight on how much would go into replacing something if you had to buy it new.  This might be helpful when setting up your new insurance policy on the business that you are buying.

Equipment valuations may take a small part in the overall view you get when you're buying a company, but it can give you a solid view of the business from an asset perspective. But just as important as getting an equipment appraisal is the equipment appraiser who does the analysis. Hiring a certified equipment valuation specialist ensures that the calculations of the equipment values are determined by someone who has learned the appropriate methodologies for any number of different situations. This ensures the equipment values they calculate will hold up to strong scrutiny and will help you with obtaining financing, covering insurance losses or fighting a bad tax assessment.

When you're considering filing bankruptcy for your business, of whatever type you select, you have a lot of decisions to make and a lot of information to sort through to make the best choices for your business' potential continuation. But what happens when your business goes bankrupt? What can you expect to happen with your business assets? Will the equipment you need be sold? During the process, an equipment appraiser is typically used to perform a machinery valuation on your business' equipment and will be required to follow strict guidelines and methodologies to ensure the that the process is equitable for all the creditors and the business itself if it is decided to remain in operation. Here are some details to help you along the way.

Filing for bankruptcy: What role will equipment values play?

When it comes to dealing with a bankrupt business, there are a number of different concepts and values that are commonly used in the process when it comes to asset and equipment valuation. Because a bankruptcy requires a court of law, there can be very specific requirements that must be met during the equipment appraisal process to ensure that the process is fair to all involved and the report accurate. There are many different situations where valuation will come into play during a bankruptcy:

• Liquidation is one of the most common types of valuation used in bankruptcy situations, because your creditors will almost always want to be paid in cash rather than in your equipment. Getting a liquidation value appraisal helps the court determine the net recovery that can come from the sale of your business assets.
• Bankruptcy code does allow for other types of valuation, however. Value in use, value in exchange, liquidation value, net realizable value or other standardized methodology may be used if directed by the bankruptcy court. These values can differ based on a wide range of other factors, so it's important to use a certified equipment appraiser with experience in bankruptcies to make sure the advisors in the process provide the right value context.
• Because a court is involved, the machinery appraiser may be required to review prior court cases to determine what the proper type of valuation should be to generate the final report. In particularly complex cases, the guidance of legal counsel may be required to determine which valuation methodology should be used in each unique situation.
• The judge may also have a say in the type of valuation being used in a business bankruptcy case. It's not unheard of for a bankruptcy court judge to require a specific type of valuation if the situation calls for it. This will limit the type of valuation that can be used in that instance.

Facing bankruptcy is a difficult task, but knowing what limitations may be involved in your case or the type of valuation to expect can make the process easier to anticipate. Knowing what to expect as the process goes forward makes it easier to deal with situations as they arise. If you're considering going through a business bankruptcy, you'll want to work with an equipment appraiser who can give you details on what's what with your company.

Imagine your business is deeply in debt. You can no longer afford to keep your doors open. You have existing inventory and assets, and you know that by selling these, you can repay some of your creditors. Yet the more pressure you have to sell your assets, the less you can command for them. To understand your options, it's essential you have an understanding of forced liquidation value. 

What is Forced Liquidation Value? 

Forced liquidation value provides a snapshot of your business in a state of crisis. An appraiser assumes you need to sell as fast as possible, which usually means at auction. Both the rush factor and the auction generally mean that you'll wind up accepting less for the piece of machinery (for example, an air compressor) than you would if you were in no rush to sell. 

By understanding forced liquidation value, you can understand where you stand, even when things are going poorly. The data that you receive from an appraiser can then help you decide your next steps. 

When performing a company valuation for assets, an appraiser will estimate that your items will sell at auction within a short time frame - say, 90 days or less. They will then add up the perceived value of all items sold via auction to arrive at the business's forced liquidation value. The forced liquidation value gives a minimum worth for the business, assuming the company can sell all assets at auction. 

To come up with an equipment valuation, the equipment appraiser must also make a series of assumptions about the auction process.  As a result of this series of assumptions, the estimated value is often a big difference from orderly liquidation value and even bigger difference from the fair market value where there is much more time to sell the equipment. 

When is Forced Liquidation Value a Good Idea? 

Machinery valuation via forced liquidation value usually works to a business's advantage when the company is in trouble and actually needs to get rid of machinery (like the air compressor) quickly. 

There is no reason for a healthy business to use forced liquidation value for equipment values, even if the company plans to sell an air compressor at an equipment auction. A healthy business could service or repair equipment before selling it at auction, whereas a company facing liquidation must sell the equipment in an as-is state. For the same air compressor, a company willing to service the equipment or wait for the right time to sell could command a significantly higher price than the company that needs to sell as-is equipment immediately. An exception may be the need to clear out the equipment so that a new line can be installed in the facility.

If you need equipment appraisals for any reason, it's important to find an appraiser who understands your industry and can accurately value your equipment. "Time to sell" is an important concept that needs to be understood and helps explain why an asset may sell for different values.