Equipment Appraisal Blog | Understanding Machinery Appraisals

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.

There are a lot of reasons why companies and individuals need professional valuation reports as part of their ongoing dealings. Collaborative transactions, such as leasing and financing, donations and gifting, estate transfer, and mergers and acquisitions, will always be part of an appraiser’s practice. That being said, company and personal disputes will always be a primary driver of business for experienced valuation professionals.

Partnerships in companies once built to last somehow weaken and crumble when decisions can no longer be mutually agreed upon. Husbands and wives, who once enjoyed a happy relationship can no longer tolerate each other and have no interest in agreeing to negotiate a fair divorce settlement due to built-up resentment and anger.

Companies collaborating on an exciting joint venture suddenly become untrustworthy of the other’s intentions and can no longer work together as a team.

I could go on with general examples, however, the point is, that there will always be disputes arising between businesses and individuals because that’s just the way life is. People you thought you trusted show their other side and eventually betray you. Others decide they want to change their habits and opinions about important issues and begin to butt heads with the ones they previously were in sync with. It’s simply human nature. Some can adapt and resolve things between themselves, however, many cannot.

When individuals begin to disagree, a wall often builds up between the parties that is impossible to tear down. What was an issue that at first could easily be negotiated or compromised on, suddenly morphs into a problem that has no right answer. Common sense goes out the window and eventually, third parties are brought in to decide the fate of the situation.

This is where outside consultants, like appraisers and industry experts, with a high level of experience, have opportunities to work independently to assist in the dispute and play a part in the eventual settlement or ruling of the case.

If you find yourself in a situation like this, professionally or personally, first look to hire a good attorney. Then, when the time is right, discuss the case with experienced accredited consultants, such as an equipment or business appraiser, who can work with you to develop unbiased opinions about the assets involved with the case.

After almost 40 years of working in the machinery and equipment markets, I find it fascinating how so much has changed but many things remain the same. Whether it involves financing and leasing, asset management, buying and selling, or independent valuation, the methodologies and mechanics of these industry sectors working together to be successful have been consistent for decades.

From an appraisal perspective, you don’t need to be an expert in any one type of market or industry to estimate value effectively. The principles and methodologies learned and practiced within the M&E appraisal profession do not change as the asset types vary. Gaining experience and developing a sound and supportable technique for appraising is the key to becoming a well-regarded appraiser.

Here are a couple of topics to think about that might help you along the way as you continue to develop your valuation skills and expertise:

Initial Information Gathering:

Obtaining the details behind the equipment you are appraising is a critical first step in providing a credible appraisal. Variables such as the year, make, model, serial number/VIN, hours/mileage, original cost, and any relevant specifications and documentation are all important to obtain. Communicate with the current owner to gain a basic understanding of the history of the machinery and gather any detailed itemized listings and support data that might be available.

Gather a Broad List of Sources

During the research process, try not to put too much weight on any one source when it comes to estimating value. Multiple perspectives from varied market sources can provide you with a balanced amount of information that you can review to ultimately form your own opinion. Remember that this is your appraisal, not simply a parroted version of someone else’s.

Don’t Rely on One Approach

From my experience, it is beneficial to consider and weigh the appraisal from both the Cost Approach and Sales Comparison Approach. Regardless of how much resale data might be available for any piece of equipment, it is also beneficial to understand the new replacement cost, useful life, and typical market levels of depreciation and obsolescence that occur with machinery and equipment. Combining the elements of both approaches can create a check and balance type system for your analysis and provide a sanity check to all the data gathered.

Like anything else in life, experience is gained by doing, and each year you can continue to hone your skills to become a better equipment appraiser.