Equipment Appraisal Blog | Understanding Machinery Appraisals

A fundamental valuation method used in equipment appraisal is the cost approach. It determines the value of equipment by considering the cost of replacing it with a similar item, adjusted for depreciation and obsolescence. There are several reasons why this approach is so important.

The cost approach offers a reasonable way to estimate value that can be relied upon by itself or as a complement to the sales comparison approach, depending on the level of market comps available to consider. It relies on tangible factors like replacement cost new, depreciation, useful life, effective age, and salvage value.

Look to establish these variables directly from the market based on available databases and third-party opinions, along with your own experience in developing and understanding the average annual loss in value from previous appraisal work. Avoid using a straight-line approach to depreciation, as it is not the way equipment actually loses value in the market or is determined in a potential resale scenario.

For businesses, knowing what it would cost to replace their used equipment with brand-new models is critical. The cost approach answers this question, providing a practical perspective for budgeting, insurance claims, and financial planning.

Many types of machinery, particularly those tailored for specific industries, lack an active secondary market. The cost approach ensures that even highly specialized equipment is valued accurately, considering its current utility along with the key variables that make up the cost approach.

While the sales comparison approach is often relied upon in equipment appraisal work, data in the external markets can often be inconsistent and misleading, with sales prices all over the place. The cost approach will assist in normalizing the data by focusing on the intrinsic value of the assets and creating a solid presentation of how machinery should resell over time as it continues to operate.

For companies with significant capital investments in equipment, utilizing the cost approach in this manner provides a reliable basis for assessing the worth of their assets. This is essential for decisions like mergers, acquisitions, investor buy-ins, and refinancing.

In summary, the cost approach offers a clear and grounded way to value equipment, ensuring that appraisals are accurate, fair, and reflective of an asset’s true worth. For businesses and appraisers alike, it’s a vital tool in navigating the complexities of equipment valuation.

Regardless of the type of property you need to be appraised, working with a certified or accredited valuation professional can make a huge difference in the reliability and thoroughness of the report. Several top organizations are well-recognized for setting the highest standards in education, ethical conduct, and ongoing professional development for appraisers. I have listed some of the most respected and widely recognized appraisal accreditation organizations below:

American Society of Appraisers (ASA)

The ASA is a multidisciplinary organization offering accreditation for appraisers specializing in a variety of assets, including real property, personal property, machinery & equipment, business valuation, fine art, and antiques. ASA’s designations, like Accredited Senior Appraiser (ASA) and Accredited Member (AM), are highly regarded for their stringent qualifications and ongoing education requirements. The organization’s broad focus makes it a great choice for companies and individual professionals who value diverse asset types.

National Association of Certified Valuators and Analysts (NACVA)

The National Association of Certified Valuators and Analysts (NACVA) is a professional organization that supports business valuation and financial forensics professionals. The NACVA offers certification, education, and resources to its members, aiming to advance expertise in business valuation, litigation support, and financial analysis.

Through its training programs, conferences, and a broad network of professionals, NACVA provides tools and standards that help members uphold high ethical and professional standards, assisting in critical areas of valuation such as M&amo;A, forensic accounting, divorce, buyout, and consulting services.

Appraisal Institute (AI)

The Appraisal Institute is one of the most prominent organizations in the real estate industry, offering the coveted MAI, SRA, AI-GRS, and AI-RRS designations. These certifications are recognized for excellence in real property appraisal, with requirements for rigorous education, experience, and adherence to the Uniform Standards of Professional Appraisal Practice (USPAP). AI-certified appraisers are known for their expertise in complex residential and commercial valuation work.

Royal Institution of Chartered Surveyors (RICS)

Although based in the UK, RICS has a global presence and provides accreditation through its chartered surveyor designation. RICS-certified appraisers are known for their proficiency in global property standards and are sought after for their specialized training in real estate, valuation, and land management. RICS is highly valued for international work and cross-border valuations.

International Society of Appraisers (ISA)

ISA specializes in personal property appraisals, making it ideal for those focusing on fine art, antiques, and collectibles. Its Certified Member (CAPP) and Accredited Member (AM) designations are recognized in this niche. ISA members are trained to appraise a wide range of valuables with accuracy and professionalism.

In summary, seek out a credentialed valuation professional when you or your firm needs an appraisal. This will ensure that the report you receive will be reliable and thorough and meet the standards of the organization from which the appraiser has received their certification or accreditation.

Being accredited equipment appraisers affords us the opportunity to be aware of the overarching transactions that our valuation work is tied to. In many cases, it is a straightforward buy/sell scenario in which our client is looking to resell used machinery that has become excess to their operation or is being upgraded with newer models.

Most times, our customers request we estimate Fair Market Value, which is the gold standard definition of value when looking at an arm’s length transaction where both the seller and buyer are on an even footing. This level of value is ideal from the seller’s perspective, given that they can expect to receive the best price for their equipment. However, there may be factors involved that will create a different situation.

For example, the owners may not normally be in the business of remarketing used equipment and need to turn to machinery brokers or dealers to facilitate a sale. Banks and leasing companies that recover their equipment and need to resell their assets would also fall into this category.

Time can also be a factor that plays into the equation. Some resellers would prefer to cash out of their used equipment sooner than later, which will result in a level of compulsion on their behalf that will ultimately affect the sale price.

In these situations, the seller needs to understand what a reasonable range of value is so they can be realistic with expectations when entering the unfamiliar scenario of reselling their used equipment.

Appraisers can greatly assist with developing this range as they can suggest to the client that they include both an Orderly and Forced Liquidation Value along with the Fair Market estimate.

Having two or three different value premises to consider instead of one will provide realistic expectations depending upon the situation the seller finds themselves in. If they would rather avoid being directly involved in the resale effort altogether, they might consider placing their assets in an auction, which would be more in line with forced liquidation. Or if they end up selling directly to a used equipment dealer, they may look to realize an orderly liquidation value level.

Whatever situation you find yourself in when needing to resell used equipment, consider looking at a range of values, which can be accomplished by speaking with an experienced appraiser who understands the differences and can help steer you in the right direction.

If your business requires a lot of machinery and/or vehicles to operate every day, there will come a time when you need to replace older models and upgrade your inventory to stay ahead of the competition and improve efficiency. If you don’t have decent trade-in options or decide to try and maximize the resale price by selling privately, you will want to better understand current market value levels.

The first thing you can do to accomplish this is to find an independent accredited equipment appraiser who can provide you with a supportable assessment of value, which will assist you throughout the process and offer additional perspective on where you can expect your resale price to fall.

The professional appraiser can provide a range of values at different market tiers, which you can use to leverage and support a fair sale price while negotiating with potential buyers. Here are the steps involved with locating and engaging with a qualified equipment appraiser:

1. Once you locate and reach out to a valuation expert during your search process, they will contact you and ask for the specifics involved with your situation and request a detailed asset listing, which will assist them in understanding the amount of work involved and provide you with a fee quote. During this phase, the overall scope of work can be discussed, including the types of values needed (typically Fair Market and Orderly Liquidation), while determining whether a desktop or an on-site appraisal is more appropriate. Cost, timing, and the details you have available will all play a part in this.
2. As soon as you are engaged, you will work further through the process so the valuation professional has the best understanding of the equipment you are selling so they can provide you with a supportable appraisal.
3. When the report is delivered to you, it will include itemized values for each piece of equipment at the tiers agreed to, along with the total for all the assets involved. If you had earlier determined that Fair Market and Orderly Liquidation are the best types of values to estimate, you would have a range to work within when setting initial pricing and ultimately negotiating a final sale.

In summary, working with an appraiser in the early stages of your plan to resell older equipment will give you a distinct advantage that will provide you with the best chance to maximize the realized sale price of your used assets.

It's a straightforward principle. When you're willing to invest more in something, you should expect a superior product or service in return. You can find a reputable and proven commodity that will undoubtedly stand out by conducting thorough research into the providers of these higher-priced goods and services. This process ensures you're getting the best value for your money and instills a sense of security and trust in your decision.

The decision-making process can be daunting, from service providers, such as appraisal firms or home improvement contractors with extensive experience and premium fees, to consumer products where you need to balance price and quality. There are always cheaper options available. However, by choosing to prioritize quality over cost, you can find the best quality items for your investment, leading to a sense of satisfaction and fulfillment with your choices.

Before you start reviewing options, decide ahead of time that you want the best there is to offer. Then, research potential service provider candidates or product manufacturers to fully flesh out who can deliver as promised.

As business and equipment appraisers with decades of experience and the best accreditation the industry provides, we know the cost of engaging with companies like us will be the more expensive option when you need valuation services. We lose out on opportunities every day because our fee structure can't compete with less experienced appraisers who lack the credentials and ability to provide a higher quality service and product in the form of an accredited report.

In the valuation industry, or any type of service, the decision to go with the best available, higher-cost option revolves around vetting several firms and determining who you believe will be the most responsive from beginning to end while working with you to understand your goals in the larger transaction or dispute being resolved. From scope of work discussion to engagement to report delivery and consulting, these services should be unparalleled in quality to any other option out there.

Once you've committed to working with these service providers or decided that you prefer to purchase the best products on the market, you can begin the process and ultimately be very satisfied with your choice.