Equipment Appraisal Blog | Understanding Machinery Appraisals

Many appraisers, buyers, and sellers involved in the aircraft industry consider the valuation of these assets unique in comparison to the rest of the equipment markets, with many businesses only willing to engage “experts” in this industry to complete the appraisal work. While it is true that the aircraft marketplace has a plethora of companies solely dedicated to working in this industry alone, when it comes to valuation, the methodologies, approaches, and data required to perform effective appraisals are very similar to the rest of the machinery & equipment markets. In fact, the very “uniqueness” in which this industry is viewed, opens the door to any number of independent sources and data points in which to gather the information required to complete a solid valuation.

Specific to aircraft appraisal, it is very common, and generally required, that for any sale, leasing, bank financing, or similar transaction, there be made available from the aircraft owner or broker, a detailed “spec sheet” that provides important data including the airframe time and landings, engine make, model, hours and cycles, avionics, interior specs, maintenance programs, ownership history, recent refurbishments, and related information. This document is above and beyond what an appraiser expects to collect during a valuation for most other types of machinery & equipment and encompasses the key parameters in developing your valuation.

Additional benefits when performing aircraft appraisals include the ability to find any number of third-party sources familiar with the industry, specific market, and make/model aircraft you’re researching, that will openly discuss and provide their opinions on. There are databases available to provide historical sales and estimated values on most types of aircraft that are built on quality information, developed over decades, by industry experts. You can also find plenty of articles written about important topics such as annual operating costs, historical fluctuations in markets, future trends based on technology advances, and any number of related areas.

In many ways, because of the constant global focus and overall significance of the aircraft industry, the amount of data available to consider when completing an appraisal is more abundant than in many other markets. An experienced, accredited equipment appraiser has all the tools available to complete a reliable, supportable aircraft valuation.

While being an “expert” in any one industry can have its advantages, the methodologies and approaches of completing an appraisal assignment are consistent across every business sector. The key components involve the collection and review of data, both specific to the asset you’re valuing, and from a reasonable number of external sources within the marketplace itself, to make the appropriate comparisons and adjustments. In all of these ways, the aircraft industry is essentially one of the most complete markets to perform appraisals in.

In our last post, we discussed the most commonly used value definitions specific to bank financing and equipment leasing. In this installment, we are focusing on internal reasons for obtaining an appraisal, such as accounting, tax, and insurance compliance requirements.

Depending on the industry you work within, certain machinery & equipment can be large and complex, involving significant investments outside of the pure “hard cost” of the assets. These expenses include shipping, construction, installation, custom build-outs, and operator training, simply to get the equipment up and running.

For these reasons, the American Society of Appraisers (ASA) developed a definition of value to consider these costs as part of the overall capitalized value of the machinery. This expanded definition is called Fair Market Value-Installed and is similar to Fair Market Value with certain considerations added.

Here are the two definitions side by side, for comparison:

Fair Market Value (FMV)

Fair Market Value is an opinion expressed in terms of money, at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts, as of a specific date.

Fair Market Value-Installed

Fair Market Value-Installed is an opinion, expressed in terms of money, at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts, independent of earnings generated by the business in which the property is or will be installed, as of a specific date.

The highlighted words in the expanded definition are what allows the appraiser to include expenses, commonly referred to as “soft costs”, as a complement to the actual purchase price of the equipment. These additional investments will add value as part of the overall asset, as long as it remains installed, which is a consideration when valuing for any internal business purpose specific to your company.

Most machinery-intensive industrial manufacturing facilities and large process production plants will see these types of costs associated with their equipment. The requirements necessary to ship large assets, often overseas, add extra foundations to safely install the equipment on the facility floor, the electrical, plumbing, and process piping needed to work with the equipment, and paying the manufacturer representatives for weeks of on-site training, are some of these costs that can be capitalized as part of the overall value of the assets.

Not every business has equipment with high installation costs associated with it, but if yours does, don’t forget to consider these additional investments as part of the overall value when working on internal compliance projects related to accounting, tax, and insurance.

Your oilfield machinery is a primary driver behind the success of your business. You haven’t considered how much your assets are worth in quite some time, however, you now need to update your insurance coverage, obtain refinancing, buy or sell some equipment or even purchase a new company to keep up with growth requirements. Understanding the current market value of your oil and gas equipment is critical for all these possibilities. Obtaining an independent valuation from an experienced accredited appraiser is equally important to you and the other parties involved in the transaction.

Factors Considered in a Fair Market Value of Oil and Gas Equipment

• Physical Deterioration: An appraiser will review the equipment, taking note of its physical condition. The old adage about never judging a book by its cover applies well to machinery appraisals for oilfield equipment. Even if an oil rig looks old and shows visible wear and tear, it is not necessarily an indication of low value. Appraisers will review the history of the equipment with you before making a value determination. Machinery that has been well maintained, with components replaced as needed, regardless of age, will likely still have significant value.
• Replacement Cost: An appraiser will estimate how much it would cost to purchase, for example, an equivalent rig, mud pump, or service truck new, and then deduct from this cost-based typical levels of market depreciation over time.
• Useful life: The appraiser may estimate the useful life of the machinery by reviewing the age, physical condition, and depreciation of equipment. Effective age is typically weighed more than chronological age if the equipment has been well maintained over its life.
• Market Data: The marketplace is where all relevant information is found during the appraisal process. We will look at recent sales and listings while gathering opinions of value from third parties who buy and sell new and used equipment every day.

Appraisers will factor all of these variables into the analysis and subjectively estimate value based on their opinion of the reliability of the data. The appraisal report will summarize this process, explain the criteria under which fair market value was determined, and provide the sources relied upon to support these conclusions.

If you are considering any business plans in the immediate or longer-term future where the value of your oilfield assets is a factor in the decision making, it is well worth the time and expense to engage an independent appraisal company to complete the task. It is important to hire an appraiser who is unbiased and experienced in the valuation of these types of assets. When your business is on the line, never settle for an appraiser who doesn’t have the right credentials or may have an interest beyond appraising your machinery. Equipment Appraisal Services is the perfect place to begin your search.

Whether your business is moving up a floor, downtown, or to a newly renovated home office, your tangible business assets should be accounted for during the process. Personal property appraisals can protect your owned equipment from any loss, damage, or liability resulting from the relocation effort. Learn what these appraisals are and why you should have an accredited equipment appraiser perform a tangible personal property valuation before this important step.

What is Tangible Personal Property?

Originally a tax term, "tangible personal property" refers to any piece of property that can be picked up and moved. “FF&E” is a common catchall term to describe many types of personal property. This acronym stands for furniture, fixtures & equipment and includes office furniture, (filing cabinets, chairs, desks, credenzas), office business equipment (printers, scanners, copiers, computers, servers and related IT assets), and other related assets. The fixtures component pertains to cabinetry, shelving, HVAC equipment, and similar items which, although installed on the premises, might be removable and worth relocating to a new facility. Appraising tangible personal property can also assist your business with insurance, property tax, and internal capitalization for accounting purposes.

While there are several reasons for hiring an equipment appraiser, relocation is an often-overlooked reason to have your tangible business property values updated.

Potential Claims & Uses

If you are working with a moving company, they probably offer liability coverage to protect themselves if they damage or lose your items during the move. One of the mistakes you can potentially make is trusting that this coverage will be sufficient to protect your property. This type of insurance typically covers claims by weight or assessed value, which is vague at best and not for your benefit as much as the movers. They will usually pay only a fraction of the real value of these assets if the liability is on their end. You need to consider your own interests in this scenario. There is also the potential for physical loss liability claims if someone is injured during the move and disruption costs to your business. For these reasons, we recommend obtaining an appraisal of your FF&E personal property so there is a clear understanding of value before your move.

These valuations can be completed by machinery & equipment and personal property appraisers. Personal property is considered a sub-class of machinery & equipment and, therefore, many equipment appraisers have experience with these types of assets.

Once you have the appraisal report, reach out to your business insurance provider and discuss covering your property for the purpose of the move. You can also consider using the report for longer-term insurance needs and other reasons such as property tax and accounting purposes.

Before they can cover a claim, insurance companies typically ask for an independent opinion of value for your FF&E. Take the extra step to protect your business assets with a tangible personal property FF&E appraisal. Even if nothing goes wrong in the move, you will have peace of mind knowing that vital business assets have been appraised at fair market value.

You have spent years building up your business, invested wisely, accounted for risk, and sacrificed a lot to build your company into what it is today. You have groomed the next generation of your family and employees to one day take over the legacy you have created.

If you own a significant amount of machinery & equipment as part of your business, have you accounted for gift or estate taxes in your planning? With the potential liability of these taxes, failing to plan for them can leave your legacy open to unnecessary costs. You can avoid this pitfall by obtaining an accredited machinery & equipment appraisal with signed certification that attests to an objective, fair opinion of value.

Whether you are planning on handing down the business or just need to update the current value of your tangible machinery assets for internal or external purposes, a documented appraisal report will satisfy several needs. It can assist in limiting any disputes in value by those taking over the business, where one family member, partner, or vested employee thinks they are getting more or less than another. If your estate and it’s associated company is being divided up between several people, an accredited equipment appraisal will help determine how all the assets can be equally divided. If you are planning on using a living trust, it also has the advantage of keeping your loved ones out of probate and will keep your accounting and wealth private.

Making Arrangements for Estate and Gift Taxes

When you have a supportable, independent equipment appraisal report in hand, you can then estimate how much these burdensome taxes may be and make allowances for them either through life insurance, business insurance, or by leaving a certain amount of equity available to cover these estate costs.

If you are thinking of estimating these values internally by simply looking for similar equipment online or finding a broker, auctioneer, or other unaccredited third parties to estimate value, you risk not having an objective, reliable report. This may cause concern by those auditing your business for estate tax purposes.

Make sure you employ accredited valuation experts who are members of the American Society of Appraisers (ASA). This ensures they follow the protocols of providing objective, supportable reports that will hold up in any business situation.