Equipment Appraisal Blog | Understanding Machinery Appraisals

Developing the foundation to becoming an independent equipment appraiser can come from many different career paths. It can be beneficial to work in another capacity before gaining accreditation in this lesser-known valuation discipline. My background began in equipment finance, leasing, and the asset management side of that business.

When people hear the term asset management, they may first think of the financial investment “money” side of the practice. However, for the past 40+ years, it has become a significant component of every equipment lending business as well.

The risk profile associated with every machinery and equipment loan or lease needs to be leveraged with the internal ability to understand better the value of the assets being collateralized by these investments. A potential exit strategy must also be put in place should the equipment be repossessed in a default situation or returned at the end of a lease expiration.

In the early days of equipment asset management, most finance companies relied on working with equipment brokers and auctioneers who managed their returned equipment and facilitated the sale of these assets under a liquidation scenario. This often resulted in exceptionally low returns to the lender, who then faced absorbing losses from their initial investments.

Working with these equipment dealers over time became an educational experience for internal asset managers, who learned how to better estimate current and future equipment values and how best to resell returned equipment for higher prices.

Over time, many of these equipment lenders, banks, and leasing companies sought out experienced appraisers and certain industry experts to work more directly with them to minimize future investment risk and maximize the return on their used equipment sales.

In many cases, they eventually hired them full-time to manage their portfolios while working closely with the rest of the investment team on a day-to-day basis to create a synergized relationship with the rest of the operation.

It is common today to see accredited appraisers working internally for many larger banks and leasing companies. Having their asset managers educated and experienced in independently appraising machinery and equipment creates the best risk profile for the financial services business, and it allows for the opportunity to maximize the resale value of their returned equipment portfolio.

When you have a serious investment in equipment, asset valuation can help you protect that investment. Typically only considered when a piece of machinery is being sold, there are a wide range of other situations where having your equipment values can be very beneficial. Here's a quick look at several different scenarios and how they can impact your bottom line.

Why do you need an asset valuation for your machinery?

Equipment Replacement

A woodworker is getting ready to replace his high-end cabinet saw, but isn't sure what it's worth. A local dealer has made an offer to take the existing saw as part of a down payment, but the figure doesn't seem quite right. By having an equipment appraisal performed, the woodworker can discover the true value of his equipment before agreeing to the deal.

Arranging Financing

A plastic manufacturer is getting ready to expand its operations and needs to secure financing to make the change. Because of past financial issues of one of the partners, the company needs to use its existing equipment as collateral for a business loan. When they provide the financial institution with a copy of the valuation report from a certified appraiser, the loan is quickly processed and the expansion is started, allowing the company to take advantage of favorable market conditions.

Insurance Claims

After a hurricane raged through rural Mississippi, flooding low-lying areas, a lumber mill faces serious losses due to damaged and irreparable equipment, potentially forcing the permanent closure of their business. Unfortunately, the insurance company that covered the machinery is taking heavy losses and trying to minimize reimbursements to clients. A machinery appraisal report verifies the pre-loss value of the machinery, leaving the insurance company with little choice but to pay the claim at the appropriate value.

Tax Assessments

A county tax assessor takes a look at a construction company's heavy equipment, but with the wide range of equipment that they assess every year, the assessor makes a simple mistake in the model number, options, packages or kits on a backhoe. It could even be that the backhoe looks okay, but has been used in harsh environments that have ended up causing significant damage to the backhoe, making it worth much less than the assessed value. An appraisal report uses solid methodology and calculations to determine the backhoe's actual value, reducing the assessment to an accurate value.

Legal Situations

During a divorce, both sides are fighting over the value of the machinery of a business that was built by the pair that is now splitting. The side that's keeping the business wants to understate the equipment value while the side that's leaving wants to get top dollar for their interest in the equipment. Getting an equipment assessment means that fair market value is represented to both sides in a court of law, meeting legal requirements for the situation.

When you understand all the situations where an asset valuation can be useful, the true value of an equipment appraisal becomes apparent. But don't settle for the dealership down the street or guessing at the value from local auction prices. To get an appraisal that will hold up well to strong scrutiny in these situations requires a certified appraiser. Make sure to check that any equipment appraiser you hire has been certified and has experience with equipment in your industry.