Equipment Appraisal Blog | Understanding Machinery Appraisals

Starting your own equipment appraisal company can be a rewarding and profitable venture. Becoming an independent business owner allows you to control your career while offering a valuable service to businesses and individuals. Here are some things to consider if you’re thinking about owning and developing your own appraisal business.

Equipment appraisers estimate the value of machinery, vehicles, and many other tangible asset types, with the main exclusion being real estate. The primary purposes for engaging with an equipment appraiser include buy/sell, accounting/tax, leasing/financing, donation, insurance, and litigation support. Clients will include banks, insurance companies, business owners, CPAs, and attorneys.

Obtaining a certification or accreditation from a reputable organization such as the American Society of Appraisers (ASA) or the International Society of Appraisers (ISA) is a critical step to gaining the experience and credibility required to attract clients.

The equipment appraisal industry is broad, covering virtually any type of tangible machinery. Specializing in a particular sector might help you stand out and attract certain clients; however, gaining experience across multiple industries will create more opportunities for business.

Consider having a minimum of 15-20 years of experience applying your skills within a larger organization before venturing out on your own. When you think you are ready, decide on a legal structure for your business, whether it be a sole proprietorship, LLC, or corporation. Formally register the company and complete all the necessary documentation.

Building a strong online presence through a professional website and social media can help attract clients. Networking with financial institutions, law firms, and business brokers can also lead to valuable referrals.

Have an understanding of reasonable fee structures and create boiler agreements and reports that will apply to any appraisal engagement. Stay updated on industry trends and take continuing education courses. Consider joining relevant associations and attending networking events to connect with potential clients.

Litigation support and consulting work, including expert witness services, can be a lucrative area if you have the right amount of experience. Research the right online sources to list your bio with.

Developing and owning an equipment appraisal business is a challenging venture. However, if successful, it will offer many rewards, including complete latitude, flexibility, and future financial independence. You can establish a thriving business by developing expertise, building a strong network, and leveraging technology. With dedication and strategic planning, you’ll be well on your way to becoming a trusted expert in the field of equipment appraisal.

One of the benefits of choosing to become an accredited equipment valuation professional is the diversified range of clientele who need these services. Regardless of the state of the overall economy or particular industry, there are potential customers that come from several different market sectors looking for experienced appraisers to assist them with their transactional or case-related deals.

Here are a few examples of the more common client types:

Business Owners

Companies that utilize a lot of equipment in their day-to-day operations commonly look to buy used equipment to replace older assets that need to be sold in the secondary market. Appraisers can assist in both of these situations.

Banks and Leasing Companies

Whether a traditional bank is looking to collateralize a loan or a leasing company wants to set realistic residual values and resell returned equipment, accredited machinery appraisers can help value both the front and back end of these deals.

Private Equity Groups

In the merger and acquisition markets, these groups will look to invest in certain equipment-based companies by acquiring them, reorganizing them, and maximizing their profitability over a short-term period. Eventually, they will resell the business within the respective industry. Machinery appraisals are needed from a risk, accounting, and tax perspective.

Attorneys-Partner Dispute Work-Divorce-Insurance

For experienced appraisers with the right credentials, teaming up with law firms on internal and external business disputes, divorce cases, insurance claims, tax issues, and related areas offers plenty of opportunities to get involved with litigation work. This allows one to build up a resume of testimony experience as well.

Individual Donors

Donation appraisals are quite common. People will give their used assets to technical schools, universities, museums, and other non-profits requiring a qualified appraisal for items valued over $5,000.

In summary, this broad range of clientele affords machinery and equipment appraisers several avenues to grow their business effectively. Think about the types of clients that would best serve your business.

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.

As appraisers, we are at times asked to estimate orderly liquidation value on a "net" basis, which adds an anticipated cost or expense element to the conclusion. These requests most frequently come from banks and other financial institutions that are not in the business of buying and selling equipment. Their goal is to make a sound credit decision, based in part on a collateral review for a loan or lease, while including a more conservative worst-case scenario, where they would need to recover the equipment and sell it at a future point in time. This might occur in a customer default and repossession situation, bankruptcy, or an end-of-lease return scenario.

For a refresher, here is the formal definition of Orderly Liquidation Value from the American Society of Appraisers (ASA):

Orderly Liquidation Value is an opinion of the gross amount, expressed in terms of money, that typically could be realized from a liquidation sale, given a reasonable period of time to find a purchaser (or purchasers), with the seller being compelled to sell on an as-is, where-is basis, as of a specific date.

This estimate is considered a "gross" amount, meaning that it excludes any associated costs of sale that may occur during the period leading up to and associated with the transaction. This is where the "net" component comes into play.

Net Orderly Liquidation Value will consider common expenses associated with a sale. These could include recovery costs such as dismantling, rigging, and shipping; short-term storage; marketing/advertising; and broker fees/commissions. Depending on each specific scenario, these expenses will vary, and some may or may not be applicable. For instance, the size and type of equipment and whether you can keep the machinery at its present location during the marketing period, are large factors pertaining to the removal costs. Leasing companies will often require their customers to return the equipment at their expense during the end of lease stages, while alternatively, in bankruptcy, the bank may need to arrange and pay for this themselves.

To that end, the appraiser will subjectively make reasonable assumptions as to what the average costs may be, in a hypothetical situation, based on their experience. They may determine the focus should be on storage and selling costs, which are more consistent and likely to occur in any situation. Either way, estimating net orderly liquidation value first requires a determination of the gross value, and then applying a reasonable percentage or dollar reduction to that figure, in order to arrive at a final conclusion. Some of the third-party sources relied upon in the normal course of the appraisal can likely assist the appraiser with this calculation.

Even though other professional appraisers may disagree with me on this topic, I find it is relevant to raise the issue of whether the income approach should apply or even be a consideration when valuing most machinery and equipment (M&E). In my 40 years of working in the M&E asset management and valuation markets, involving machinery across virtually every known industry, I can count on one hand how many times I have even attempted to assess and place weight on this approach. The same goes for the number of times I have been asked by a client even to consider it.

In layman's terms, the Income Approach estimates the current value of the future economic benefits of owning a particular piece of equipment. Similar to using this approach to estimate the value of a complete business or real property (land, buildings, and related assets), which is relevant in many cases, it requires the ability to clearly separate and directly apply revenue and expenses to M&E.

A scenario where this might be possible is a business that owns a rental fleet of equipment such as trucks, trailers, or heavy machinery. Both short- and long-term rental history could be considered and potentially applied to estimate the value of this type of activity. There are concerns, however, as to the validity and reliance of the assessment.

First, it is common practice in the equipment rental industry to apply discounts to the eventual purchase price of these assets based on past rentals when their clients eventually want to buy them outright. Even with large assets such as aircraft, this is not unusual. The result is that a significant portion of rental income lessens the real market value of the equipment, causing it to get tangled up with the other approaches to value.

Second, assuming you can estimate value under the Income Approach, given the restrictions and requirements, how do you weigh the result in the context of the other approaches, namely Cost and Sales Comparison (Market)?

You cannot completely ignore the other two approaches, as they should be considered and applied to some degree in every equipment appraisal regardless of the purpose, especially if the income approach estimate is materially different from that of the cost and market methodologies. I have never completed an M&E valuation without placing weight on each of these two methods.

In summary, these are just two of several issues that create concerns about the appropriateness of utilizing the income approach to assess M&E value. Contact an accredited professional appraiser to learn more on the topic.