Equipment Appraisal Blog | Understanding Machinery Appraisals

A successful and reputable appraisal firm will have clients who return and ask to have their machinery and equipment appraisal reports updated. This could occur for any number of reasons. For example, they may want to track annual changes to their asset portfolio internally to determine material changes in value and ensure their capitalized depreciation records are current. They could be working on a long-term business plan to potentially merge with another company, or they might be trying to continue to attract investors and utilize lenders for new working capital infusion.

Whatever the reason, the quality report you provided the client with during the prior experience will have them coming back for an updated version. Here are a few things to consider as the appraiser when this occurs.

• Check the period when you last updated the report. The amount of time that has elapsed will drive your scope of work and decision-making process. If it has been over three years, then you can treat the engagement like a new assignment without stating that you have more recently completed an appraisal of the same equipment and, therefore, do not need to call it an update.
• If you have appraised the assets of the company in less than three years, then you should make a statement to this effect in your certification and refer to the valuation as an update.
• Clarify whether the purpose of the appraisal has changed and whether this may lead to adjusting the scope of work and include different value premises.
• Determine if you need to go back on-site or are able to complete the appraisal as a desktop. The opposite may also be relevant, where you weren’t able to complete an inspection the last time you issued the report, and you feel it is important to conduct a field visit this time around.
• Does the client expect a discounted fee given the work previously paid for? Before you grant this, ask them how much has changed with the makeup of the asset portfolio, which may create the need to include a significant number of different machines recently acquired.
• Your goal should be to utilize, in some way, the previous work that was done and create some efficiencies so you can deliver the report in a timely fashion. The client may have loved the prior report; however, they may be inherently assuming by coming back to the same firm that the project will be less expensive and time-consuming.

Repeat business is the goal of any small business, and having clients return on a semi-regular basis with updates or new projects will lead to a steady source of revenue while further building a solid reputation for you and your valuation company.

Specifying the use of an appraisal report is another requirement that accredited/certified appraisers need to conform with. Recently, we discussed identifying the intended report users, and the actual use of the report can be indirectly related to this. The importance of specifying the intended use of the report is primarily to protect the appraiser should their report somehow make its way into the hands of a third party unrelated to the original stated use or the intended users themselves.

Once the appraiser delivers their report to the client, the level of control they have as to its future distribution begins to lessen. It is not uncommon for the appraisal report to be later sent by the client to various other parties, some of whom may or may not be intended users.

One example of this would be where the client is a financial institution, which then sends the report to the target company being appraised and under consideration for approval to lend against the equipment as collateral for a loan. If the financing arrangement is not finalized, the bank’s client, who now has a copy of the report, will seek an alternative to obtain the financing they still need. Even though they were not the appraiser’s client, they will send the report to the new bank or leasing company, who in turn will review it and potentially contact the appraiser asking questions about it.

The appraiser needs to make it clear that the parties now involved are unrelated to the original client or original use of the report, however, if they would like to engage in an updated report specifically addressed to them, that might be a workable option.

Another example would be where an appraisal client who owns a company has all their equipment appraised for the intended use of selling the business. After the report is delivered, the sale never transpires, and the client decides later on to use the report to try and obtain a loan against the value of the machinery.

The appraiser might then receive a call from the bank they are working with that wants to use the report as the basis for financing. The appraiser needs to make it clear that the report was not written for the purpose of financing. but the potential exists to work with the bank by updating and expanding the report to satisfy the needs of a loan approval. This would be under a new engagement with a new client, similar to the prior example.

I have also seen instances where appraisal reports get drawn into litigation involving the company’s assets that were valued for a completely different purpose prior to the legal case. The appraiser must treat this the same way, making it clear to all parties involved that, even though the prior report was not intended to support the case at hand, they would be willing to assist in the situation. New discussions will need to take place to develop an updated report with a new intended use.

Every appraisal engagement needs to clearly define the scope of work before it can begin, as several things need to be clarified upfront. Two of these areas involve designating the specific client who will sign the contract and have control over the process, as well as the intended users, who, besides the client, will be additional parties allowed to have access to the report.

This may sound straightforward, and in some cases, it is, however, there are several instances where it won’t be clear in the early stages how this will need to be set up. For example, if the owner of the equipment is looking to obtain a loan to secure additional working capital for his business, there will undoubtedly be a bank or leasing company in the middle of the transaction that may prefer to be the primary client. The equipment owner can be listed as an intended user, which allows the bank to share the appraisal with them after it is finalized and delivered. The appraiser should not discuss the values or share the report directly with the owner at any time, without the bank client’s permission. This can be a bit tricky though, given much of the information the appraiser needs to complete the assignment will be coming directly from the owner.

In this same instance, there may be underwriters of the loan, such as the Small Business Administration (SBA) or the US Department of Agriculture (USDA), who have their due diligence to perform as part of the approval process and will want a copy of the report. The valuation professional should be certain they include these parties as intended users, and avoid communicating with the underwriters directly.

Another example might be with legal cases and/or estate settlements, with attorneys involved in the transaction, as well as trustees and partners. The same type of discussion should take place early on to clarify who the direct client will be as well as the additional intended users. This is not always done the same way, and it will be at the discretion of all parties to make it clear to the appraiser how they prefer to structure this.

The appraiser needs to control this process to a certain extent and make it evident that the client will be the primary party receiving the report, and the intended users should not be directly involved unless they are critical to obtaining certain data. If the intended users request a copy of the appraisal report, the client should be made aware and ideally be the one who sends the report to them.

In general, try to avoid co-client agreements as they will likely become even more convoluted than having multiple intended users. As the appraiser, when in doubt, always contact the client first and discuss any communications and requests coming from the intended users before you act on them and make it clear to everyone that the client has the final say in how the document flow should be handled.

As an accredited professional appraiser who has been around a long time, I have taken a liking to working on valuation consulting projects to shake up the routine of the day-to-day standard appraisal work. I have found that the more experience you have, the more opportunities arise, providing opportunities to think outside the box a bit more than usual.

Valuation consulting can mean different things; however, the basic premise of these assignments is to provide insights and opinions to clients that are specific to valuation without the necessity of a formal appraisal report. These may be relevant for business and legal disputes, leasing and financing transactions, internal tax and accounting requirements, or even insurance cases. Typically, consulting projects will involve providing opinions of contractual documentation language, or the review of other valuation reports, where the knowledge and experience the consultant has specific to valuation and related topics can be relied upon.

Similar to valuation reporting, consulting provides an independent third-party assessment that can assist in internal decision-making or support litigation case arguments for your clients. It is important to consider bolstering your opinions with source material, just like you do for an appraisal, but also look to create a thoughtful and reasonable assessment of the opinions being requested.

Consulting assignments provide the chance to bring some of your unique experience and perspective to the table and allow you to elaborate on the relevant topics by drilling down on the specific points of contention. Consider gaining a broad understanding of the overall situation and the goals of the client to potentially create other opportunities to expound upon.

The more you understand the big picture, the better prepared you will be to provide further thoughts and opinions that may assist even further than initially anticipated. Just like any personal or work-related experience, the more you know about it, the better your response will be.

In summary, valuation consulting is probably not going to be a primary driver for an appraiser’s business, as the projects generally are few and far between. When they do arise, however, take full advantage of the opportunity as you will not only be helping your clients, but furthering your expertise as well.

Complete independence is something most of us long for when it comes to living our lives. Although the definition in this context is somewhat different as compared to independence in a business transaction, the same level of importance applies to the term. Without independence in business, there exists the possibility that one or more parties involved may be making decisions or influencing those who make them in order to attain a desired result.

When value is part of the equation in a transaction, the stakes are even higher, and the risks involved are much greater. Value equals money and we all know how money can drive a lot of poor decisions.

With that idea in mind, it brings us to the concept of an independent and unbiased appraisal. Believe it or not, it was only around 35 years ago that federal and state regulators began mandating that all independent appraisers become certified, accredited, and/or licensed to become qualified. Before that time, many appraisers were not governed by these rules, which essentially means they had no official oversight. Thus, their independence, as well as the formal knowledge and understanding of how to complete an unbiased third-party valuation were not evident.

Since that time, appraisal foundations that were already in existence began to prosper, allowing for expanded oversight as well as the creation of more formal educational and experience requirements for appraisers. Formal standards of professional appraisal practice become more entrenched into the process that formally certifies and accredits valuation experts.

These changes were welcomed by banks, insurance companies, investors, and business owners, as there was now a high level of confidence that their transactions would include a fully independent assessment of value with the associated companies and their underlying assets, such as real estate, machinery & equipment, and intangibles.

The additional costs associated with these fully independent appraisals were outweighed by the added benefits, as the risk of any possible bias in their deals was significantly reduced.

In summary, there are still companies out there who claim to be appraisal experts but do not hold the required certifications or licenses needed to comply with all the regulations currently in place. Ensure that you don’t engage with any business or individual who is not accredited by a reputable appraisal association as they are not governed under these rules of independence.