Equipment Appraisal Blog | Understanding Machinery Appraisals

If you run an appraisal practice and don’t have enough employees to handle all of the responsibilities, or if you simply want to cut back on your workload, hiring a subcontractor might be an affordable and effective option. Consider them as an alternative to expanding fixed overhead that might be only a temporary need or a more permanent way to bridge a gap in staffing. Subcontractors can save you time and excess costs, in comparison to other options.

If you run a national practice, one of the areas where hiring subcontractors might be a good choice is field work or site visits. Some inspection companies have local contacts across the country in every state and major city that you can hire to gather photographs and additional asset information during the appraisal process. As long as you work closely coordinating scheduling and ensuring the inspection directives are clear, this may end up saving you time and money in comparison to driving for hours or flying out to the facility yourself.

Another area where subcontractors might assist you in your valuation is with industry experts who can provide supporting research and reliable opinions of value to bolster your report. If you’re working on a project where the equipment has a limited secondary market or data is hard to come by, it might be worth it for an expert in the field who buys and sells the machinery to provide you with a written summary opinion that contains the details necessary to solidify your value estimates.

Before you commit to engaging with a subcontractor, take a long look at the overall scope of work and the larger transaction involved with the appraisal. With fieldwork, ensure you are advising your client that you will remain the primary contact throughout the process and that the valuation analysis will be your work product. Advise them the inspector does not have valuation experience but is qualified to work with them to gather photos and complete a basic inventory validation with the asset listing provided.

There will be projects where you feel the only way to accomplish the fieldwork properly is to visit the site yourself or to send one of your employees, so pick and choose the projects as you see fit.

Industry expert subcontractors may come in particularly handy if you are working on a legal case where you could end up providing your report to the courts in an effort to facilitate a dispute. Judges will tend to rely more on valuations that are supported by multiple sources, and having one or two written supplemental opinions will bolster your work product.

In summary, subcontractors, if vetted properly and chosen for the right projects, can be a useful tool for equipment appraisal professionals.

After almost 40 years of working in the machinery and equipment markets, I find it fascinating how so much has changed but many things remain the same. Whether it involves financing and leasing, asset management, buying and selling, or independent valuation, the methodologies and mechanics of these industry sectors working together to be successful have been consistent for decades.

From an appraisal perspective, you don’t need to be an expert in any one type of market or industry to estimate value effectively. The principles and methodologies learned and practiced within the M&E appraisal profession do not change as the asset types vary. Gaining experience and developing a sound and supportable technique for appraising is the key to becoming a well-regarded appraiser.

Here are a couple of topics to think about that might help you along the way as you continue to develop your valuation skills and expertise:

Initial Information Gathering:

Obtaining the details behind the equipment you are appraising is a critical first step in providing a credible appraisal. Variables such as the year, make, model, serial number/VIN, hours/mileage, original cost, and any relevant specifications and documentation are all important to obtain. Communicate with the current owner to gain a basic understanding of the history of the machinery and gather any detailed itemized listings and support data that might be available.

Gather a Broad List of Sources

During the research process, try not to put too much weight on any one source when it comes to estimating value. Multiple perspectives from varied market sources can provide you with a balanced amount of information that you can review to ultimately form your own opinion. Remember that this is your appraisal, not simply a parroted version of someone else’s.

Don’t Rely on One Approach

From my experience, it is beneficial to consider and weigh the appraisal from both the Cost Approach and Sales Comparison Approach. Regardless of how much resale data might be available for any piece of equipment, it is also beneficial to understand the new replacement cost, useful life, and typical market levels of depreciation and obsolescence that occur with machinery and equipment. Combining the elements of both approaches can create a check and balance type system for your analysis and provide a sanity check to all the data gathered.

Like anything else in life, experience is gained by doing, and each year you can continue to hone your skills to become a better equipment appraiser.

Many experienced and credentialed appraisers augment their services as expert witnesses in litigation matters such as prolonged business disputes and personal divorce cases. Working with clients and their attorneys leading up to a possible trial is common practice for valuation firms; however, these cases are often settled before testimony is required.

If the litigation does reach trial or arbitration, there is the likelihood that testimony will occur either during the trial or before, in a deposition format. As an expert witness, before the pandemic, it was generally a requirement to attend these hearings in person, which involved additional time and costs for travel and sitting in court waiting to testify.

Over the last 2+ years, there has been an abundance of “catch-up” work by the courts and attorneys given the delays in advancing cases during the pandemic. As a result, a high number of valuation assignments associated with these cases have moved to deposition or trial, creating an increased level of requests for expert witness testimony.

Fortunately, the opportunity to testify remotely online has allowed appraisers to avoid spending inordinate amounts of time traveling around the country to attend these in person and then having to sit idly waiting for their turn to appear as a witness.

One of the few silver linings associated with the pandemic was the widespread acceptance of a remote work model, which includes a significant amount of communication handled through an online format, such as Zoom or Microsoft Teams. This has now become commonplace for expert witness testimony and, as a result, has allowed appraisers to provide this service more affordably to their clients.

Based on my own recent experience, this process has by and large been successful, and the likelihood of creating a more permanent change to include remote testimony options at trial and deposition will continue to develop in the long term.

Like many other industries, technological advances over the last 15-20 years have played a significant role in creating efficiencies for appraisers to manage their workload and grow their businesses to new levels without spending a lot of additional time and expense to accomplish this. The opportunity created by remote expert witness testimony is one of these critical areas of advancement, and appraisers should take advantage of this as much as possible.

When an appraiser estimates value, they must do so under an assumed premise that relates to the type of transaction being undertaken and the potential outcomes of an impending sale. Premise of value is one of the most critical components of an equipment appraisal given the different assumptions each premise represents and their material differences.

Each value premise must be defined in the appraisal and can reasonably be tied to a typical market transaction, such as a user-to-user sale or an auction liquidation. The most commonly referred to premise is Fair Market Value, which is utilized in many standard business agreements when the need arises to assess value for any purpose. The American Society of Appraisers defines Fair Market Value as follows:

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.

There are variations to the Fair Market Value premise, including assumptions for installation and continued use, which typically drive higher levels of value given the additional considerations involved. The important factor to understand with Fair Market Value is that it represents the most equitable transaction for both parties, where neither the buyer nor seller have an advantage. Each party is equally willing to transact and knowledgeable of all the facts.

In the open resale marketplace, this may not always be the case, therefore, other premises of value are considered, including Orderly and Forced Liquidation. These definitions add the factor of compulsion on behalf of the seller, with more limited time to sell a key factor. These premises are appropriate to consider with an inexperienced owner or if a company goes out of business. There may be a reduced level of control over the sale by utilizing a third party, such as an auctioneer, to liquidate the assets. This is the foundation for Forced Liquidation Value.

Liquidation premises of value are commonly reviewed by banks and other lenders who want to consider the possibility of having to step in and resell the equipment if their borrower defaults and they end up taking possession of the assets. They are not in the business of buying and selling machinery and may involve an equipment dealer or auction company to manage the logistics of a resale effort.

These liquidation premises will obviously drive a lower estimated value for the machinery & equipment. How much lower will depend on the type of equipment and the state of the resale market, among other factors. Consult with an appraiser to better understand these differences.

Whether your business is expanding or going through a downturn, being purchased or sold, audited or invested in, refinanced or liquidated, it is important to understand the real market value of your tangible assets, specifically the machinery & equipment that work every day behind the scenes.

Obtaining an equipment appraisal from a qualified valuation firm such as Equipment Appraisal Services can provide you with firsthand knowledge of the value of your machinery and what to expect should you wish to buy, sell, refinance or upgrade these types of assets in the resale marketplace. A formal appraisal analysis and report can assist you in any number of ways as you move through the next phases of your company’s development and can be shared with third parties who may be assisting you with these project plans.

Our appraisers can visit your operations facility and perform an on-site personal inspection and discuss your business directly or complete a “desktop” appraisal based on the information you provide to us, including detailed asset listings and photographs.

The experienced appraisers at Equipment Appraisal Services have been completing these types of fully researched valuations for decades and can meet the demands of any machinery & equipment appraisal assignment across all markets & industries. We look forward to the opportunity to work with you as a key component to your ongoing business projects.