Equipment Appraisal Blog | Understanding Machinery Appraisals

Specifying the use of an appraisal report is another requirement that accredited/certified appraisers need to conform with. Recently, we discussed identifying the intended report users, and the actual use of the report can be indirectly related to this. The importance of specifying the intended use of the report is primarily to protect the appraiser should their report somehow make its way into the hands of a third party unrelated to the original stated use or the intended users themselves.

Once the appraiser delivers their report to the client, the level of control they have as to its future distribution begins to lessen. It is not uncommon for the appraisal report to be later sent by the client to various other parties, some of whom may or may not be intended users.

One example of this would be where the client is a financial institution, which then sends the report to the target company being appraised and under consideration for approval to lend against the equipment as collateral for a loan. If the financing arrangement is not finalized, the bank’s client, who now has a copy of the report, will seek an alternative to obtain the financing they still need. Even though they were not the appraiser’s client, they will send the report to the new bank or leasing company, who in turn will review it and potentially contact the appraiser asking questions about it.

The appraiser needs to make it clear that the parties now involved are unrelated to the original client or original use of the report, however, if they would like to engage in an updated report specifically addressed to them, that might be a workable option.

Another example would be where an appraisal client who owns a company has all their equipment appraised for the intended use of selling the business. After the report is delivered, the sale never transpires, and the client decides later on to use the report to try and obtain a loan against the value of the machinery.

The appraiser might then receive a call from the bank they are working with that wants to use the report as the basis for financing. The appraiser needs to make it clear that the report was not written for the purpose of financing. but the potential exists to work with the bank by updating and expanding the report to satisfy the needs of a loan approval. This would be under a new engagement with a new client, similar to the prior example.

I have also seen instances where appraisal reports get drawn into litigation involving the company’s assets that were valued for a completely different purpose prior to the legal case. The appraiser must treat this the same way, making it clear to all parties involved that, even though the prior report was not intended to support the case at hand, they would be willing to assist in the situation. New discussions will need to take place to develop an updated report with a new intended use.

There are many reasons why business owners need to have a current appraisal completed for their machinery and equipment. Refinancing, mergers and acquisitions, tax and accounting regulations, trade-in or liquidation, new investors, and business disputes, to name a few. For each purpose, it is important to have a clear understanding of the appropriate types of values that will fit the particular project, as there will likely be a material difference between them.

Here are the most common types of value premises utilized in equipment appraisal, and their definitions as listed by the American Society of Appraisers:

Fair Market Value-Installed

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, considering market conditions for the asset being valued, independent of earnings generated by the business in which the property is or will be installed, as of a specific date.

Fair Market Value

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.

Orderly Liquidation Value

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.

Forced Liquidation Value

An opinion of the gross amount, expressed in terms of money, that typically could be realized from a properly advertised and conducted public auction, with the seller being compelled to sell with a sense of immediacy on an as-is, where-is basis, as of a specific date.

Fair Market Value-Installed is often used when the equipment is part of a manufacturing or production facility where a lot of additional costs are associated with the purchase and installation. Fair Market Value is perhaps the most recognized term and best represents an arms-length transaction with no other considerations. Both Orderly and Forced Liquidation values are utilized by banks for financing purposes and by sellers who don’t have the ability or reputation to market their machinery in competition with typical dealers.

Before undertaking the valuation project you are working on, discuss these different premises of value with an experienced accredited appraiser who can assist with making the right choice.

Those unfamiliar with the methodologies and approaches equipment appraisers utilize in their work, commonly believe we are very similar to accountants, who analyze data and perform calculations to arrive at a factual conclusion. While there is certainly some mathematical analysis involved in an equipment appraisal, the ultimate conclusions opined on have a degree of subjectivity given the incongruities often found in the available information uncovered.

Even an asset as straightforward as a truck or trailer can have any number of differing market opinions and comparables to review and consider, before ultimately determining a reasonable value.

A more appropriate example would be that of a jigsaw puzzle, where several of the pieces don’t quite fit. The pieces come from three typical buckets of historical and current information, including (1) secondary market comparable sales and listings; (2) estimated replacement cost new, opinions on useful life and average market-derived depreciation; and (3) specifics on the actual machinery being appraised, such as historical costs, specifications, usage, hours/miles, and maintenance.

All of these three areas should be researched and considered as part of the build-out of the puzzle. However, given the potentially large amount of information compiled from these buckets, there will always be pieces that need to be adjusted in order to make sense of the overall picture. I have found it is rare when it all fits together perfectly and, therefore, the final conclusions of value require some subjective decision-making on the part of the appraiser.

This is where experience, common sense, and practicality all make a difference in the final steps of the analysis. A+B+C will not always equal D and is not just a straight-line calculation. Quite frankly, this is a primary reason experienced appraisers are utilized in business transactions and is what separates a really good appraiser from an average one.

The ability to take a step back and make sense of all the information to ultimately conclude on value is a nuanced effort that should be supported by reasonable logic. When you place the last pieces and see the complete puzzle, there may be a few gaps and some bent edges, but the overall picture is clear enough to make sense of it all.

There will come a time when your business or individual practice will need to appraise your used equipment. You may have a desire to sell and replace with newer machinery, refinance an existing inventory, seek new investors, settle an estate or transfer the assets of the business into a new entity. Depending on the type of equipment you own and operate, the amount of data available to review in the marketplace will range from overwhelming to non-existent

The most difficult step in the process of estimating used equipment value is making sense of the information you uncover, or lack thereof. For commonly resold assets such as construction equipment, trucks, and forklifts, you can find many similar comparisons in the market, however, the range in pricing can vary greatly. On the other hand, if you own a specialized piece of machinery that is customized to your specific operational needs, the resale market will not be the best place to search for information.

Equipment appraisers face these challenges every day, which is an excellent reason to consider engaging with an experienced, accredited valuation expert to assist in this effort. Over time, a seasoned appraiser will have developed sound strategies to reasonably determine value regardless of the type of assets you own. In the meantime, here are a few tips that can help you along the way:

Consider Multiple Sources

It’s not uncommon to see used equipment with the same year, make and model selling for vastly different prices in the marketplace at the same time. This could be due to any number of variables such as condition, hours/mileage, location, and recent refurbishments being completed. Oftentimes it's simply because dealers are testing the waters to see if they can obtain an inflated price given no immediate concern to sell. With all these factors at play, it is difficult to make sense of the varying data.

It’s important to investigate as many distinct sources as you believe reasonable and see if you can determine patterns that will allow you to better value your equipment.

Look at Multiple Perspectives

Given the inconsistent data found in the marketplace, alternate perspectives can bring the valuation process into better focus. Research what you paid for the equipment when you originally purchased it and consider the history of your usage and time since it was acquired. Determine what you believe to be a reasonable useful life for that equipment along with typical levels of depreciation that make sense in the context of your experiences as an owner-operator.

Finally, consider contacting your local equipment vendor to discuss what similar new equipment is selling for and gather their opinions on the current market.

Recognize the Specific Premise of Value You Need to Measure

Appraisers can provide estimates of value at different market levels, and your situation may fall into one or another, as you determine the need to sell. If you are in a hurry to turn your assets into cash, or just don’t have a lot of time to market your equipment, consider an Orderly or Forced Liquidation. If you are selling the assets as part of a larger transaction and the purchaser will be taking over some or all of your operation, then Fair Market Value is realistic, with consideration for applicable installation costs and related expenses to bring the equipment into operation.

In summary, it is always a good idea to consider bringing in an experienced appraiser to help you through this analysis who can develop an independent, unbiased process that will be supported by one or all of these methodologies.

Image source Random Retail on Flickr license

The COVID-19 pandemic has brought with it many unanticipated shifts and changes. Some of the more prominent of these occurring in the global business marketplace include unanticipated machinery, parts, and raw materials shortages in a number of key industries including construction, transportation, automotive manufacturing, furniture, and technology.

Prior to the COVID pandemic, many regional areas, both domestic and overseas, were experiencing a prolonged lack of economic growth, which led manufacturers to slow production across key economic markets. By the latter half of 2020, these same manufacturers began experiencing historically high levels of demand driven by workplace and consumer lifestyle changes creating a supply shortage.

This supply shortage, coupled with an unabated increase in demand, has resulted in significant price increases and backorder delays for many types of equipment, personal property, replacement parts, and raw materials. The providers' costs to purchase and transport these products have increased so dramatically that some are simply waiting for the market to adjust while others are passing these costs onto their clients who have no choice but to pay now or lose out on precious contracts. The growing concern is that this severe imbalance in the market is not going away anytime soon, and manufacturers will therefore continue to be unable to provide a reasonable product delivery timeline for correspondingly reasonable costs.

The resulting impact in the used machinery & equipment marketplace is one that is fairly obvious. Any business looking to sell or liquidate their excess property is able to find a greater number of potential buyers, leading to a material increase in value for their assets, given the immediate availability to sell. This increased demand may be short-term, or more likely, it will last for the better part of 2022, given the slow lag time before new tangible products are more readily available.

If you’re considering selling used equipment, parts, or inventory, make sure you can easily replace it, either through the company’s existing asset base or with replacement machines that are available at a reasonable price in the market. If you are looking to purchase used equipment or parts, it may be the best option from a deliverable timing viewpoint, however, you may have to increase your budget to reflect this shortage in the market.

From a valuation perspective, an appraiser may or may not take the impact of these market changes into account when completing an assignment. It will come down to the circumstances involved in the overall scope of work effort and their own subjective opinions on the long or short-term effects in the marketplace. Either way, you should look to engage an experienced, accredited appraiser to complete the work.