Equipment Appraisal Blog | Understanding Machinery Appraisals

When it comes to expert valuation assignments, a combination of objective independence and subjective opinion must occur to fully analyze the data compiled during analysis to determine a realistic conclusion. This is especially true with machinery & equipment appraisals, as multiple sources are typically utilized, the sum of which provide varying degrees of information.

There is no question that experienced appraisers with certifications and accreditations to their name must be 100% objective in providing their work with no bias or influence from any third parties. This is the fundamental foundation of the valuation industry and cannot be argued against.

That being said, an appraisal is an estimated opinion of value, and opinions are inherently subjective, regardless of the number of sources and documented information the opinion is based on. This is where the experience of the appraiser becomes critical to the reliability of the value assessment itself.

Taking this a step further, the source material an appraiser researches, reviews, and relies upon will likely have potential gaps, flaws, or opinions tied to the data, which the appraiser must make sense of and determine how best to correlate the information into a final conclusion.

In the machinery & equipment markets, data will be available in the form of listings, databases, and third-party opinions from those that manufacture, buy and sell in the industry. Depending on the commonality of the equipment, this will either be in abundance or in a more limited capacity and in either case, should be considered and weighed. Industry benchmarks and trends, such as those published in the Bureau of Labor statistics, news articles, and related sources, are other points of reference.

All of this data cannot be taken at face value for any number of reasons. Are the available listings consistent and reasonable? Are the database sources full of gaps from a lack of prior sales data? Are the opinions from third parties biased in their own right? Do industry trends focus directly on the equipment being valued?

It is eventually the appraiser’s role to sift through all this information and arrive at a common sense conclusion using their own experience and ability to put the pieces together, many of which may not be a perfect fit. This process is what separates the established valuation experts from the rest of the pack. Subjectivity will always be a component of an appraisal, regardless of the number of sources you rely upon. Being able to establish confidence and credibility with your opinions, thus making them valid and supportable, is one of the most important roles of a professional appraiser.

Most business owners have an opinion of what their assets are worth based on their day-to-day experience operating them. They probably remember what they paid for even their oldest vehicles and equipment while understanding the amount of maintenance and extra work that has been invested in them over the years.

If this holds true for you and your company, then why would there be a need to conduct an appraisal using an outside firm that doesn’t have this first-hand knowledge? What could they possibly know that you don’t?

The short answer is that a third-party appraisal is required from time to time. Whether it is your accountant, attorney, bank, investment partner, insurance agent, or a potential buyer, any of these employees or external relationships may recommend you obtain a valuation of the tangible assets for your business.

The advantages to obtaining an appraisal are not just limited to the requirement involved. For example, if your bank advises that the Small Business Administration (SBA) will be involved in your company’s refinancing plans, it will likely be a requirement to obtain an independent third-party appraisal of the assets, or collateral, supporting the new loan. Not only will the formal valuation report satisfy this need, but it will also provide you with an impartial, unbiased opinion of value for all your machinery, equipment, vehicles, and FF&E owned by the company. The report could be used for other internal needs as well, such as supporting a higher value for your overall business or updating property insurance coverage.

Any time you have an experienced, professional, third-party firm assist in validating the true value of your equipment, or any other facet of the business, the results will be viewed as realistic and objective, which brings a high level of credibility to you and your associates. It is always prudent to remove the inherent subjectiveness that might be weighing in with your own opinions.

As with any major life decision being considered, it is usually a good idea to obtain opinions from those who may be able to view things from a different perspective before the ultimate decision is made. Once trust is established with these partners, you will be able to rely on them to help you along the way.

Whether you own a small business or are personally responsible for paying property taxes on your vehicles and equipment, you have likely questioned the validity of the value assessment assigned to these assets on a year-to-year basis. You look back at when they were purchased and how old they are, and try and determine if the numbers make sense in the context of actual market prices.

If you own a significant amount of furniture, fixtures, and equipment (FF&E) or vehicles, where the annual tax liability is substantial, you may have entertained the idea of disputing these estimates while looking to have the assessment adjusted to match your own internally calculated figures. Property tax disputes are not uncommon, however, if you go down this road, you will likely need independent support to present a sound case where the end result is fair and reasonable.

How are property taxes calculated on vehicles and equipment?

Unlike real estate taxes, where reassessments are completed by counties, cities, and towns every few years, based on an updated market analysis, assessments on vehicles and equipment rarely change from their initial estimates.

The purchase price and date of acquisition are the starting point where the assessor then determines a useful life and annual depreciation schedule matching the type of asset that is involved. For example, if you bought a new pickup truck for $40,000 this year, you pay property tax based on this initial cost, and again every year, under an internally calculated useful life depreciation table created by the assessor’s office. The useful life may be estimated at 10 years with annual depreciation of 6% to a salvage value of 40%. If you still own the truck after 10 years, the assessor may slow the depreciation even further going forward.

Every city and town has its own mill rate percentages which are applied to arrive at your tax payment, and cannot be disputed. The value estimate, however, is the area to target in any case where you believe it does not equate to market value. These assessments are usually calculated on very broad assumptions, while the depreciation is slow and on a straight-line basis. The salvage value estimates can tend to be quite high in comparison to fair market value

If you believe your property tax assessments are much higher than the actual market value, you can file a dispute, and even have it done retroactively, to cover prior tax periods in earlier years. It’s always a good idea to complete a detailed internal assessment first, and then reach out to an accredited appraiser who can independently perform an appraisal on your vehicles and equipment. The more prepared you are throughout the dispute process, the better chance you have of a fair and successful outcome.

Over time, business owners will need to consider investing in improvements to their facility and associated property if they have significant brick-and-mortar buildings where employees work and production is ongoing. Just like the purchase of real estate and equipment, these enhancements can be capitalized as a tangible assets and depreciated. In turn, they add value to the company’s infrastructure and can be appraised.

These investments are referred to as either leasehold or building improvements. The primary distinction between the terms is based on who the owner of the property is. If your business leases the building as a tenant with a landlord involved, then you would treat these as a leasehold improvement on your books. For internal depreciation purposes, they should be amortized over 15 years.

If your company owns the buildings and land, then the improvements are capitalized as part of the real property and treated as building assets, which are depreciated over a longer term, consistent with real property accounting rules.

From a valuation perspective, leasehold improvements can be appraised on an “in-place” or “installed” basis, since they only hold value to a building tenant while the business remains in operation. If your business relocates in the future, you cannot physically carry these assets with you to the new location.

As a result of this, in the long run, building owners reap the rewards of the improvements should their tenants vacate the premises, which can benefit their lease pricing and carry it over to a new company moving in even just a few years after the improvements were completed. Try to work with the landlord while you can, to gain some type of lease break or other benefit if you pay for these improvements.

You often see this scenario with heavy turnover businesses such as restaurants and related food services companies, as well as start-ups in tech and scientific industries. It’s a good idea to have an improvement investment concept in place, that you can show the building owner while you’re negotiating the lease terms. It’s also beneficial to work with your accountant and engage with an independent valuation firm to determine your best options as you move forward with your growth plans.

Machinery & Equipment valuations rely in large part on available market data that can be researched and considered. This information can be in the form of recent sales, current listings, new equipment pricing, opinions on normal useful life, and average annual levels of market depreciation.

Two of the most common sources of this data are equipment dealers (vendors) involved in the retail sale of new and used machinery, and auction companies, who liquidate thousands of used machines each and every year through advertised public sales. How does an experienced appraiser review these sources, and consider them when valuing similar assets?

The answer to that question will likely vary somewhat depending on the appraiser you are working with, however, it is important to first understand the differences between equipment dealers and auctioneers, along with the levels of value each of these sources equate to.

New and Used Equipment Dealers

These market sources are usually experienced in specific equipment types and manufacturer/model lines and can provide valuable insights on the overall market, new and used equipment pricing, normal useful life, and how the assets typically decline in value over time. This data and their general opinions are viewed as direct Fair Market Value comparisons, however, they can also discuss how they purchase used equipment such as typical buy/sell margins from an Orderly Liquidation perspective.

It is important to keep in mind that, although equipment dealers are considered experts in their specific market areas, there may be some level of bias associated with their opinions. It is always a good idea to consider additional perspectives in order to gain a balanced conclusion of value.

Equipment Auctioneers

Auction companies are well recognized in many types of equipment markets, most notably in construction, earth moving, transportation, material handling, machine tools, and certain industrial manufacturing industries. Auctioneers provide a convenient, time-sensitive opportunity to liquidate assets under an organized public sale, and may even provide guaranteed buy-out options as an alternative for those unwilling to take on the risks associated with a “no-reserve” sale.

Because these sales are in the public arena, much of the data can be discovered quite easily through company websites, online databases, and other open sources. Auction sales data technically falls under the comparison to Forced Liquidation Value from an appraiser’s perspective, and actual realized sales can vary greatly depending on the type of equipment, buyer turnout, seasonality, and any number of other factors. Because of the potential inconsistency associated with this data, it is important to understand how best to consider it in conjunction with other sources of data to then conclude on a reasonable value.

In summary, new and used equipment dealers, along with auction companies, are considered two of the most important market sources of data for machinery & equipment appraisers. Making sense of this information and ultimately forming an opinion of value for the actual assets being appraised is the most critical step in any valuation effort. Engaging with an experienced, independent, accredited appraiser will provide you with confidence that the result will be credible and reliable.