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.

Accredited and certified appraisers are responsible for certain hours of continuing education to maintain their credentials. As part of this perpetual training and learning experience, there are numerous requirements we adhere to that pertain to each valuation assignment and scope of work effort. Two of these important prerequisites dictate that every report must have a specific use or uses, as well as defined intended users. If the client uses the report for another reason or discloses it to parties unnamed, this is a violation of the engagement terms.

Here is a great example of why this is important to an appraisal assignment.

Potential Future Business Disputes and Litigation Unrelated to the Prior Valuation

Let me preface this by saying there are many instances where an experienced appraiser will be engaged to value businesses, machinery & equipment, personal or real property, as an independent expert, in support of an existing dispute or ongoing litigation. This is one of the primary reasons to engage with an appraiser, to facilitate a settlement, or in support of a trial or arbitration.

There are times when, months or even years later, the client who originally engaged the appraiser for a completely different purpose, such as a sale, purchase, or refinancing, is involved with a future dispute that leads to litigation. Somehow, the old appraisal gets drawn into the case, likely, because the value of certain assets has become a factor in the dispute. Lo and behold, the report is now being thrown around the courts between opposing sides of the case. The appraiser is ultimately dragged into the conflict, unwittingly, and is being asked to present confidential data, and potentially be subpoenaed or testify at a later date.

As long as there are clear statements in the engagement agreement and report regarding the intended purpose and users for the valuation, in addition to a clause addressing client confidentiality, the appraiser is protected from involuntarily being dragged into the proceedings.

The prior client and appraiser need time to directly discuss the case and the reason why the original valuation report might be used. During this discussion, it should be determined who may be involved in engaging the appraiser for what is now considered a new consulting and updated valuation assignment. I’m highlighting this phrase so it is clearly understood, there needs to be a professional discussion between the prior client, attorneys and courts involved, so the appraiser can be comfortable that:

1. There are no potential disclosure issues involved.
2. They are the ones allowing (or disallowing) the prior report to become part of the case.
3. They are entering into a new engagement with the appropriate parties to present any data related to the prior work, begin a new consulting assignment, and/or update the report.

This is the appraiser’s work product, and there are obligations and privileges which need to be recognized by any and all parties now involved with the litigation dispute. Any future work requested should be compensated by the new clients, based on the current rates of the appraiser.

In summary, documentation requirements required by the governing appraisal bodies, such as intended users and report purposes, are important for the appraiser and their clients to understand so any future developments are handled professionally and sensibly.

An accredited, reliable, and defensible equipment appraisal should include at least three components: a USPAP (Uniform Standards of Professional Appraisal Practice) and ASA (American Society of Appraisers) compliant narrative summary report discussing the valuation methodologies and conclusions; an appendix that itemizes the assets that include associated details; and photographs of the equipment.

The narrative report is structured fairly consistently throughout every valuation, with the appraiser focusing on the processes, methodologies, scope of work, assignment summary, definitions used, research, market and industry sources utilized, and the value conclusions.

The photographs are self-explanatory, and ideally include a couple of images of each item along with the machine ID tags, which verify the specifications of the equipment. There are exceptions when photographs cannot be obtained in certain cases, and the appraiser can usually make allowances for this without compromising the integrity of the valuation.

The most important component, in my opinion, is the itemized asset detail, typically listed as an appendix to the report. This document is the backbone of the appraisal and includes the data necessary to document the transaction for which the appraisal is to be used. Regardless of the number of assets involved, this detail is useful for the business owner’s internal accounting and tax records, as well as providing documentation for third parties, such as investors, banks, financial institutions, and tax authorities, when they secure or review their collateral interests.

This detailed appendix should include the following information for each line item asset being appraised:

Description/Equipment Type: (Ex: Hydraulic Excavator or Vertical Machining Center)

Make/Manufacturer (Ex: Caterpillar, Mitsubishi)

Model #

Serial #

Year Manufactured or Effective Age, if Unknown or Refurbished (Common for Older Assets to Extend Their Useful Life)

Additional Specifications and Comments Section (Ex: Condition if other than normal or good; Capacity, Hours/Mileage, Attachments)

Estimated Individual Values and Summary Totals

The report narrative summary will generally only reference the total value for all the assets appraised and refer to this appendix for the itemized detail.

It is not uncommon for clients to request this detail in a separate workable file, so they can better utilize the data as well as transfer it to their internal documents. This is generally acceptable to the appraiser, with the firm understanding that the data itself will not be altered. As long as the appraiser retains the original files, any potential disputes on this issue can be easily remedied.

In summary, when you are considering engaging an equipment appraiser, ensure that these component documents will be part of the overall valuation report and that you are working with an experienced accredited, ASA machinery appraiser.