Equipment Appraisal Blog | Understanding Machinery Appraisals

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.

Machinery & Equipment (M&E) valuation relies in large part on understanding the new and used trade markets and developing an analysis that reasonably reflects what the particular assets being appraised would be worth in those markets. Another important component of an M&E appraisal is looking internally at the business that is or was directly involved with the most recent purchase and operation history of the equipment to understand the facts behind this.

The additional perspective an appraiser receives by learning this history is critical to making potential adjustments to the market information they research. This history provides in-depth specifics for the machinery actually being valued that can’t be disputed. Every piece of equipment is unique in its own way. There may be somewhat different specifications between the assets being valued and what is available as a comparison in the market. Materially different hours or mileage may become a factor to consider as well as any recent upgrades or refurbishments completed.

Knowing the original purchase price of the machinery, even if it was acquired several years ago, will assist in reasonably verifying that the replacement cost estimates you determine are accurate. Appraisers cannot blindly assume all the independent market information they uncover is 100% bulletproof, as sources can be limited in their ability to provide all the right answers. This is perhaps the biggest challenge in the equipment industry. Unlike business valuation, where databases and historical financial data are almost always available, or real estate, which has a tendency to provide a wide array of published comparable property resale data, the machinery markets can behave in very inconsistent ways.

You will commonly see the same makes and models of equipment, with virtually identical specifications and usage, listing and selling for vastly different prices. The auction marketplace, which reflects billions of dollars of used equipment sales annually, experiences varying levels of demand, any of which may play a part in developing values for many types of assets. With the recent growth in online auctions across these markets, these disparities can be even more pronounced.

In summary, the historical data you can provide to an appraiser that complements their independent research and analysis will be very helpful in ultimately determining a reasonable and supportable value for your M&E.

As an accredited or certified machinery and equipment appraiser, you will learn that three approaches to value are considered for every appraisal: The Sales Comparison, Cost, and Income Approaches. Except in rare cases, only the first two are utilized in a typical valuation as business revenue and expenses under an income approach are very difficult and impractical to apply directly to equipment as part of a larger operating facility. Here are a few broad discussion points regarding these two primary approaches.

The Sales Comparison Approach, which is commonly referred to as the “market” approach, focuses on the research and analysis of similar used machinery being bought and sold in the resale marketplace. The appraiser reviews available listings, sales, and databases, while gathering opinions of value from dealers and other resellers, and ultimately adjusts the data to reflect a reasonable opinion of value based on the specific characteristics of the assets being appraised.

The Cost Approach relies on the determination of key variables that pertain to estimating equipment value, including replacement cost new, useful life, effective age, and annual levels of depreciation. Understanding how these factors work in conjunction with each other, as well as providing additional perspective to complement the sales comparison approach, will create a balanced opinion of value.

Both approaches should be considered and relied upon to a certain extent in every equipment appraisal to avoid a limited perspective. The amount of data the appraiser can develop under each approach will determine the level of weight assigned to each. In some cases, the equipment may have a limited amount of used market data and need stronger reliance on a cost approach and vice versa.

It is important to understand where the most reliable sources of data are found under each approach and how to reasonably interpret them. The valuation professional should look to specific market and industry sources that directly relate to the subject assets being valued. The appraiser should also avoid taking every source at 100% face value while creating a “common sense” approach that brings the information together to form a realistic opinion of value.

Keep in mind the conclusions you ultimately estimate are your opinion, and not anyone else’s. You will cite all the sources you relied upon; however, they are individually only one component of the overall appraisal that you develop. The more experience you gain over time will bring these processes into better focus as you continue to understand the nuances of machinery and equipment valuation.

When it comes to defining the term “assets” there are so many different types that it can be difficult to understand which belong in the various categories that appraisers are familiar with and can value based on their credentials and experience. Machinery & Equipment (M&E) appraisers have, by far, the broadest array of varying property types for which they may be capable of valuing.

The clear exceptions for M&E appraisers would be intangible assets, such as a company’s overall goodwill, customer lists, trademarks, patents, domain names, and the like; and real property, most commonly viewed as buildings, land, and their associated improvements. Other areas where different kinds of expertise are required would be gems and jewelry, fine art, antiques, and other collectible types of property.

Beyond these obvious distinctions, the vast majority of all other tangible assets could potentially fall under an equipment appraiser’s purview. Here are some examples that you might not have considered:

Tangible Personal Property

This is a very broad term that is intended to primarily distinguish an individual’s ownership vs. a business. Therefore, many of the asset types are the same as what an equipment appraiser would see in a company machinery appraisal. Items such as furniture, audiovisual equipment, trucks, automobiles, hobby shop equipment, and appliances are a few of these asset types.

FF&E

This term stands for furniture, fixtures & equipment. It is often considered a “catch-all” term that groups a company’s office equipment, such as printers & computers, as well as furniture, including desks, chairs, and filing cabinets together under one common category. Fixtures refer to those items that are removable properties and thus not considered a building improvement.

On-Hand Inventory

A company’s raw materials, finished goods, spare parts, tooling, and other types of on-hand inventory have tangible value to a business. It is common for machinery & equipment appraisers to educate themselves and understand reasonable approaches and techniques to value this kind of property.

In summary, if you own these kinds of assets, and need them appraised for any reason, your best bet is to consult with an experienced M&E appraiser and determine if they have the experience to get the job done.

As an experienced accredited machinery & equipment appraiser, I am occasionally asked by potential clients if I have expertise in the specific industry they operate within. My response is that, after 40 years of involvement in the machinery & equipment world, I have worked within their industry several times, however as a professional appraiser, I go where the work takes me, across any and all markets and businesses. An appraiser’s focus is on valuation, which utilizes consistent approaches and methodologies across virtually all industries while gathering the more specific market data particular to each project to support their opinions.

In contrast, an industry expert will typically act as a consultant in any number of capacities that are specific to the businesses operating in these markets. For example, an aviation industry expert may have worked as an engineer throughout their career for companies that manufacture, purchase, sell, or provide services to the fixed-wing aircraft markets. In their current role, they now provide independent consulting to clients who are investing in these markets and need guidance on current trends and technologies.

Given the broad range of services an industry expert can provide, they can afford to keep their focus within specific markets and leverage their technical knowledge and relationship networks to add value to their client’s transactions. Valuation services may be one area they provide guidance on, however, given it is not their sole focus, it is not common to see an industry consultant have the accreditations a professional appraiser requires.

That said, experienced qualified appraisers and industry-focused experts are not mutually exclusive. Certain accredited equipment appraisers have a lot of experience within focused markets, while some industry consultants may have ample experience reselling used machinery and providing clients with value opinions along the way that would be considered reliable. Appraisers will at times work with an industry expert and consider them one of several sources that support their valuation opinions.

In summary, one important distinction to make is that an accredited appraiser adds value as an unbiased independent third party who will provide their opinions with no ulterior motives or overreliance on any one source. They can provide supportable valuation reports across any market or industry. In contrast, an industry consultant may act as a primary or exclusive source that provides their opinions on transaction-related topics based on their past experiences and knowledge specific to a market. Complete independence may not be a requirement but should be understood, to avoid a situation where the opinions and advice an industry expert provides are not tied to a transaction in which that consultant may be invested in themselves.