Equipment Appraisal Blog | Understanding Machinery Appraisals

Machinery & Equipment valuation relies in part on understanding the new and used trade markets and developing an analysis that reasonably reflects what the subject assets being appraised would be worth in those markets. Before you even start to investigate this research, an early component of an M&E appraisal work effort involves the receipt of detailed data from the client that clearly identifies the machinery, including specifications and purchase history.

The additional perspective an appraiser receives by obtaining this data at the beginning of the engagement has many benefits. It saves the appraiser time by having them recreate this information themselves and allows them to price the valuation more competitively, given the time saved by performing this task themselves. Asset history provides specifics about the machinery being valued, which builds the foundation for the appraisal.

Every piece of equipment is different in its own way. The specifications, hours, mileage, usage factors, as well as upgrades and refurbishments completed at certain points in time, will all factor into the ultimate conclusion of value.

Knowing the original purchase price of the machinery, even if it was several years ago, will assist in reasonably verifying that the replacement cost estimates you determine are accurate. Appraisers cannot blindly assume all the independent market information they uncover is 100% bulletproof, as sources can be limited or inconsistent across multiple market sellers.

This is perhaps the biggest challenge in the equipment industry. Unlike business valuation, where databases and historical financial data are available and consistent in form, and real estate, where published comparable property resale data is more definitive, equipment market data can be erratic and full of gaps.

You will commonly see the same makes and models of equipment, with virtually identical specifications and usage, listed and selling for vastly different prices. The auction marketplace, which reflects billions of dollars of used equipment sales annually, experiences varying levels of demand, leading to less reliable data with a wide range of price points.

For every valuation assignment, consider performing a direct and/or indirect cost approach, which can be developed from the historical data provided by the client, as well as research into new equipment pricing in the market. This perspective will provide additional support and complement the market approach, ultimately determining a reasonable and supportable value for the equipment.

When it comes time to have a business appraised, whether it’s for a potential sale, purchase, re-financing, new partner investment, or even for internal planning and accounting, if the company owns personal property, machinery & equipment, it makes sense to consider valuing these assets as well.

A business appraisal will involve a review of the company’s financial statements, which include these tangible assets listed at some depreciated cost basis, and may not accurately reflect current market value. Especially if the property was purchased years ago and subject to a short-term, accelerated form of depreciation. This will lead to a likelihood that the net book value on the account ledgers for the personal property and equipment will be at or close to $0.

If the company being appraised will, in part, be affected by re-establishing the current value of the personal property and equipment, then engaging in a distinct appraisal for these assets should accompany the business valuation.

As an example, if the business appraiser is valuing a machine shop and, while reviewing the financial statements, finds a net book value of $100,000 in depreciated machinery & equipment, this is the figure he will use for the overall asset valuation analysis. If, however, an equipment appraisal is completed in conjunction with the valuation effort, and the current market value for these same assets is estimated at $500,000, then this figure will override the internal depreciated number, realizing a significant increase in overall tangible asset value.

This adjustment to the company’s books will truly reflect the overall value of the business and can be used for any of the purposes discussed earlier. It will also provide peace of mind to all parties involved in the larger transaction being reviewed, knowing that an independent third-party appraiser has updated the key components of the business that drive overall value.

There are a handful of appraisers in the marketplace who can value both the machinery & equipment and overall business for their clients. Many of them are larger, conglomerate-type companies who may overcharge you. Equipment Appraisal Services and our sister company, Business Valuation Specialists, can provide this capability to you at an affordable cost while delivering the highest level of service available. Contact us in the comments section below, at equipmentappraisal.com, or businessvaluations.net to see what we can do for you and your business.

For machinery & equipment (M&E) appraisers, there are basically two approaches to value that are ultimately relied upon when completing valuations: the Sales Comparison Approach and the Cost Approach.

Here is a brief description of each:

The Sales Comparison Approach

The Sales Comparison Approach indicates value by analyzing recent sales (or offering prices) of properties that are similar (i.e., comparable) to the subject property. If the comparable data is not identical to the properties being appraised, the selling prices of the comparable items are adjusted to equate them to the characteristics of the properties being appraised.

The reliability of this technique is dependent upon the degree of comparability of each property with the property under appraisal; the time of the sale; the verification of the sale data; and the absence of unusual conditions affecting the sale. This approach focuses on the actions of actual buyers and sellers.

The Cost Approach

The logic behind the Cost Approach is the Principle of Substitution: a prudent buyer will not pay more for a property than the cost of acquiring a substitute property of an equivalent utility.

Using the Cost Approach, the appraiser starts with the current Replacement Cost New of the property being appraised and then deducts for the loss in value caused by physical deterioration, functional obsolescence, and economic obsolescence.

The third approach to value, the Income Approach, is rarely used for M&E appraisals, and I will leave that discussion for another time. The Sales Comparison Approach is also commonly referred to as the “Market Approach”, however, don’t let that trick you into thinking the only time you rely on market data is under this approach. To effectively use the Cost Approach, an appraiser should rely on the marketplace as well, to estimate the variables involved with this approach, including replacement cost new, useful life, depreciation, and salvage value.

Perspective From Both Approaches

Every appraiser has their own process as to how they ultimately utilize the tools available to determine value. It is ultimately an independent, unbiased, subjective opinion, based on the gathering of a reasonable amount of data, which is developed during a research and analysis process.

To that end, from my experience, I have found it beneficial to take components from both approaches, established directly from the marketplace, and create a dual perspective that ultimately forms credibility checks to both, and provides the appraiser with supportable conclusions. Given that comparable sales data can tend to be inconsistent from machine to machine, even from the same sources, this blended approach can create a way to make sense of all the data points and better understand how particular assets should depreciate in the marketplace under normal maintenance and wear and tear guidelines. The use of the Cost Approach in any other way, such as using straight-line depreciation to cover all forms, or trying to develop credible levels of replacement cost and obsolescence by using broad industry data, is simply not reliable or supportable.

In summary, regardless of how much weight an equipment appraiser places on either of these two approaches during a valuation analysis, they should assure their clients that the data collected comes directly from the marketplace. The independent sources that an accredited M&E appraiser can find for virtually any type of asset are out there and available, they just need to do a bit of digging to find them

As a business, your investment in your equipment is a large part of your overall assets. Knowing how long that equipment will continue to operate is an important piece of information to help you plan your company's future expenditures. But the remaining useful life can be hard to determine. Fortunately, there's a way to get around the difficulty in determining this expected lifespan. Machine appraisers spend all day looking at and appraising equipment, so they not only have experience in how to calculate the estimated remaining lifespan but also know how to recognize signs that may extend or shorten machine lifespan. Here's a quick look at the overall process and what aspects may impact your equipment's estimated remaining life.

How does a machine appraiser determine remaining useful life?

Machines, like people, can age at different rates. Imagine a two-pack-a-day smoker with bad genetics who has done heavy construction and drinks a six pack every evening, before taking a ride down into some scary parts of town while never going to the doctor. If this individual made it past 50, it would be a miracle. The health guru with perfect genetics, a stress-free life and a love for fitness who regularly has health screenings may expect to live past the century mark at this point. Much like people who do or don't take care of themselves, machines can fail at different rates.

One area that can quickly impact machine lifespan is the environment in which it is used. Much like the smoker, a piece of equipment that is kept in a damp, dirty environment with extreme temperatures will tend to degrade much faster than one kept in a clean, dry environment with regulated temperatures. The bad genetics would represent the expected overall lifespan of a specific model of equipment, such as a model known for issues that will not last as long as similar models because of poor manufacturing, materials or mechanical problems. At the same time, the heavy construction background represents hard use of the machine. Equipment that has been used at the very top of its range of specifications, received hard use in a short period of time or otherwise abused will have a much shorter lifespan than may otherwise be expected.

When an equipment appraiser looks at a piece of machinery, there are a number of clues they can take into account. In addition to already knowing a rough range of estimated overall lifespan, the appraiser can look at the exterior for signs of abuse, including dents, bends or evidence of poorly-made repairs to determine any excessive use the equipment may have received. A look at internal components may reveal failing mechanisms that could cause a serious failure down the road. Checking out the environment may lead to details about whether a fresh coat of paint may stop corrosion or if the rust may cause a premature failure.

The process of estimating remaining useful life can be a daunting task, but with an equipment appraiser taking over the process, you'll quickly have the information you need for your business planning purposes. Be sure to check whether your equipment appraiser is certified, as the methodologies used by certified equipment appraisers have stood up to strong scrutiny in a wide range of situations. This means the remaining equipment lifespan they estimate for you is much more likely to be a good tool for your business planning needs.