Equipment Appraisal Blog | Understanding Machinery Appraisals

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There are times when a machinery & equipment appraiser needs to include a visual site visit inspection as part of their valuation assignment however, due to scheduling, location, or cost concerns, cannot complete the fieldwork themselves. When this occurs, it is imperative that an alternative game plan be developed to ensure the inspections are completed in a timely and professional manner while still obtaining the critical information an inspection normally produces.

One option is to engage with a collateral inspection company whose primary job description is physical asset verification. There are a handful of these types of firms in the marketplace, and most have a significant number of employees and contractors spread across the country that enables most inspections to be handled locally.

Ordering the inspection is a fairly straightforward process that can often be done by completing digital forms found on its website. These will provide them with the type of equipment, location, contact, and timing information. If necessary, you can add specific detailed instructions to the work order and directly engage with the local contacts if this level of management is required. You can track the progress of the scheduling and once the job is completed, you will receive a report that includes a number of photographs to go along with the asset verification report. Utilizing this type of equipment inspection service is typically cost-effective and efficient, and can be expedited in just a couple of days for an additional fee if preferred.

From the appraiser’s perspective, it is important to know when this service makes sense and when it might not be the best solution. Collateral inspection companies are not appraisers, nor do they usually have the expertise required to create a detailed asset listing from scratch in cases where the equipment detail you receive in advance is incomplete or non-existent. There will always be situations where you, as the accredited, experienced appraiser, will need to go out yourself and gather the detail necessary to properly identify and describe the assets to complete a credible valuation.

The quality and quantity of the data an appraiser receives at the beginning of an assignment will generally dictate if an on-site visit is required and, if so, whether a collateral inspection firm would be a good fit to assist with the fieldwork. Every valuation project is unique and it is the responsibility of the appraiser to understand how best to tackle the scope of work and deliver a reliable report.

Whether you work at a conventional bank, leasing company, investment house, or private equity firm, there are several options when it comes to mitigating the risk involved with short and long-term lending. The phrase "collateral" can mean any number of different types of assets that the targeted business has available to pledge as security in a transaction. Depending on the type of company doing the lending or investing, they will identify and independently value the collateral as part of the deal structure.

The following assets are considered the most common collateral:

Tangible Asset Types:

Real Property - Buildings, land, improvements, and certain fixtures

Machinery & Equipment - Typically applied to commercial and industrial business-owned assets. Common examples are construction equipment, trucks, trailers, and machine shops.

Personal Property - Typically identified for individuals and residential properties. Common examples are cash, furniture, household goods, jewelry, and artwork.

Intangible Asset Types: Stocks, bonds, business goodwill, patents, trademarks, customer lists/relationships, established websites, domain names, intellectual property, and trademarks.

From the perspective of conventional banks and leasing companies, tangible assets drive the collateral value assessment when working with businesses or individuals that own a significant amount of real estate and equipment. These organizations understand the overall company value is significantly higher than the sum of the tangible property, however, the ability to “touch and feel” the assets which secure their investment loans and leases brings a higher comfort level.

They are generally in for the long haul with their clients, sticking with them for several years while looking to provide competitive interest rates.

Investment houses, private equity firms, and similar institutions typically take a shorter-term look at the business which creates an opportunity to consider intangible as well as tangible assets when approving and collateralizing transactions. Simply put, overall business value, which combines every asset type into the appraisal equation, is a useful tool for these investors to assess their risk level.

This strategy is logical given the low probability that a significant change in the business will occur when viewing it from a 12-24 month perspective vs. the longer-term bank and leasing company directives.

In summary, collateral is a key component of virtually every investment transaction in the marketplace. Determining the types of assets which will secure these deals depends on the risk profile each company puts into practice. When considering utilizing these types of financial institutions and investment firms, ensure you understand these factors before committing to a business partner.