Equipment Appraisal Blog | Understanding Machinery Appraisals

There are times when used equipment dealers and resellers are asked to provide estimated values for the types of machinery they sell. Alternately, independent equipment appraisers have clients who wish to market their assets for sale, while asking the appraiser if they have experience liquidating the M&E they value. There are both similarities and differences between independent machinery & equipment appraisers and used equipment resellers, which creates a fine line between the two that should never be crossed.

When researching market values, equipment appraisers will contact used machinery dealers in the relevant industry, such as earthmoving, truck transportation, or parts manufacturing, to name a few. These vendors can provide insightful data to the appraiser, specific to the makes and model types they sell, which becomes one of several sources relied upon during the valuation analysis.

Equipment dealers often provide their clients with estimates of value prior to engaging in a resale effort, to assure them of their experience and to manage expectations for the eventual prices realized at sale. Both appraisers and resellers are continually crossing paths in the used equipment marketplace, even though their primary focus is quite different.

Here are some other distinctions to consider:

An accredited appraisal is an independent, unbiased opinion of value based on a blend of approaches and methodologies which, in part, consider the opinions of certain used equipment dealers. An experienced equipment appraiser will consider multiple sources before ultimately concluding on a value opinion.

This opinion is not a guarantee of a sale price outcome and the information they receive from equipment dealers will be subjectively weighed, depending on the rest of the information they gather. Equipment appraisers typically have a broad degree of experience in many distinct markets and industries, directly tied to their client’s businesses.

A used equipment dealer, on the other hand, will usually focus on a particular market, and more specifically, certain makes and models of machinery with which they have built their support and credibility over the years. These dealers will have a significant amount of expertise in these more refined areas but their primary goal is in the sale of equipment. While they understand value as a result of this experience, they are not considered independent or accredited appraisers. There may even be some level of bias in their opinions, given their ma objective is to sell, not appraise.

In summary, appraisers and used equipment resellers are quite different in their overall skill sets, however, the markets they work in often overlap. It’s prudent to understand the distinctions of each, so you can create the most beneficial team around you when it is time to consider buying, selling, or financing your machinery & equipment.

As many are witnessing significant increases in residential and commercial real estate market prices and rental rates, due to the economic issues facing the country, the used machinery & equipment sales have experienced similar price adjustments. While appraisers and resellers can research and support these inflated prices based on actual sales, many banks and financial services companies are taking a more conservative approach when it comes to lending practices.

Still stinging from prior market “bubbles” which ultimately popped and led to significant defaults and write-offs in past decades, these equipment and real property borrowing sources are taking a more conservative approach when approving loans and investments using these assets as collateral.

Even before this most recent wave of used property value spikes, lenders would typically approve based on 60-80% of fair market value or 80-100% of an orderly type of liquidation value. This was considered normal business practice and for the most part, continues today. The biggest change we are seeing now is they are not taking every appraisal at face value with an understanding that current market conditions are in certain cases, unprecedented, with price increases at a dramatically high level.

Lending institutions are looking back at previous market levels for similar properties and equipment, and attempting to support a more reasonable value that will hold up over the long term. The biggest concern to owners and buyers looking to borrow or refinance is the lower level of funds approved, requiring a larger out-of-pocket cash down payment on the assets.

It is prudent to keep this information in mind as you look to acquire used machinery & equipment over the next year. While you may have no choice about the price you’re paying for these assets, the lending markets are becoming savvier in their approval practices, which will require more flexibility when settling up with sellers. If possible, try to keep an extra amount of cash on hand available to fill in the gaps.

Those unfamiliar with the methodologies and approaches equipment appraisers utilize in their work, commonly believe we are very similar to accountants, who analyze data and perform calculations to arrive at a factual conclusion. While there is certainly some mathematical analysis involved in an equipment appraisal, the ultimate conclusions opined on have a degree of subjectivity given the incongruities often found in the available information uncovered.

Even an asset as straightforward as a truck or trailer can have any number of differing market opinions and comparables to review and consider, before ultimately determining a reasonable value.

A more appropriate example would be that of a jigsaw puzzle, where several of the pieces don’t quite fit. The pieces come from three typical buckets of historical and current information, including (1) secondary market comparable sales and listings; (2) estimated replacement cost new, opinions on useful life and average market-derived depreciation; and (3) specifics on the actual machinery being appraised, such as historical costs, specifications, usage, hours/miles, and maintenance.

All of these three areas should be researched and considered as part of the build-out of the puzzle. However, given the potentially large amount of information compiled from these buckets, there will always be pieces that need to be adjusted in order to make sense of the overall picture. I have found it is rare when it all fits together perfectly and, therefore, the final conclusions of value require some subjective decision-making on the part of the appraiser.

This is where experience, common sense, and practicality all make a difference in the final steps of the analysis. A+B+C will not always equal D and is not just a straight-line calculation. Quite frankly, this is a primary reason experienced appraisers are utilized in business transactions and is what separates a really good appraiser from an average one.

The ability to take a step back and make sense of all the information to ultimately conclude on value is a nuanced effort that should be supported by reasonable logic. When you place the last pieces and see the complete puzzle, there may be a few gaps and some bent edges, but the overall picture is clear enough to make sense of it all.

Image source: Aqua Mechanical on Flickr license

I have heard and used this phrase many times over the years when people are discussing the topic of quality vs. price in both everyday life and business. It is a commonplace belief that the more you pay for something, the better the product or service will be. While there are always exceptions to this axiom, where services are concerned, the fact is that higher quality costs more since it requires experience, integrity, and expertise.

I have personally learned this to be true from my experiences working with sub-contractors, landscapers, tree care companies, accountants, attorneys, even my personal and pet groomers. From a consumer product perspective, it is more of a challenge to compare price vs. quality, given the broader competitive marketplace. There are many reliable, less expensive options out there, however, you should still consider paying a bit more to get the best quality for your hard-earned cash.

The bottom line is twofold:

Make the decision ahead of time that you want the best there is to offer and; research potential candidates to fully flesh out who can deliver as promised.

As machinery & equipment appraisers with decades of experience and the best accreditation the industry provides, we know the cost to engage with us will not be the least expensive option when you are in need of valuation services. We lose out on some opportunities every day because our cost structure will never compete on price with less experienced appraisers who lack the credentials and ability to provide a quality service and product which, ultimately, will be deemed unreliable to both you and any third parties involved in the transaction.

In all markets and industries, both personal and business, these high-to-low-end service options are available to everyone.

In the valuation industry, the “get what you pay for” difference revolves around working with a machinery & equipment appraisal firm that is extremely responsive from beginning to end, and becomes a partner who best understands your goals in the overarching problem being solved. From the scope of work discussion to engagement, to report delivery and consulting, these products and services are of unparalleled quality when compared with any other option out there.

Once you have determined this type of relationship is the one you want to be involved with, please reach out and let us know what we can do for you.

Small business startup companies are popping up all the time, especially in newer industries such as cannabis and green energy, with consistently growing markets in biotech, construction, transportation, and IT. When you are involved in a new business startup, one of the priorities will likely be gaining access to working capital that will allow the business to get off the ground while investing in marketing and product development costs. Prospective investors may not rely solely on growth potential and an aggressive 5-year revenue forecast, therefore, collateralizing your recently acquired machinery and equipment will be your strongest option.

It is important for your startup to have the best, state of the art equipment on hand to begin operations, and whether you’ve already acquired these assets with your own investment funds, or you need the capital to purchase these critical components to your business, it is important to have detailed documentation available, so investors know what they have as tangible security.

Another important step will be to engage with an experienced, accredited machinery & equipment appraiser, who can independently support the value of your assets, on both a current basis and over that 5-year initial business plan you’ve put together. The appraiser will research the industry and develop opinions of value and useful life at various levels of the market while providing sources who are familiar with the manufacturing and resale of these types of machines.

This unbiased report will bolster confidence in any parties interested in taking the ride with you during the initial phases of your startup, including private investors, financial institutions, and your traditional banking relationships. While everyone knows your integrity and prior success in business, they will look to checks and balances with their decision-making, which an independent appraisal and industry review will satisfy.

In summary, ensure you work with an appraiser who has the expertise to provide a reliable, supportable report and takes the time to understand the full perspective of your goals, as you venture forth with your startup business.