Equipment Appraisal Blog | Understanding Machinery Appraisals

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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.

An accredited, reliable, and defensible equipment appraisal should include at least three components: a USPAP (Uniform Standards of Professional Appraisal Practice) and ASA (American Society of Appraisers) compliant narrative summary report discussing the valuation methodologies and conclusions; an appendix that itemizes the assets that include associated details; and photographs of the equipment.

The narrative report is structured fairly consistently throughout every valuation, with the appraiser focusing on the processes, methodologies, scope of work, assignment summary, definitions used, research, market and industry sources utilized, and the value conclusions.

The photographs are self-explanatory, and ideally include a couple of images of each item along with the machine ID tags, which verify the specifications of the equipment. There are exceptions when photographs cannot be obtained in certain cases, and the appraiser can usually make allowances for this without compromising the integrity of the valuation.

The most important component, in my opinion, is the itemized asset detail, typically listed as an appendix to the report. This document is the backbone of the appraisal and includes the data necessary to document the transaction for which the appraisal is to be used. Regardless of the number of assets involved, this detail is useful for the business owner’s internal accounting and tax records, as well as providing documentation for third parties, such as investors, banks, financial institutions, and tax authorities, when they secure or review their collateral interests.

This detailed appendix should include the following information for each line item asset being appraised:

Description/Equipment Type: (Ex: Hydraulic Excavator or Vertical Machining Center)

Make/Manufacturer (Ex: Caterpillar, Mitsubishi)

Model #

Serial #

Year Manufactured or Effective Age, if Unknown or Refurbished (Common for Older Assets to Extend Their Useful Life)

Additional Specifications and Comments Section (Ex: Condition if other than normal or good; Capacity, Hours/Mileage, Attachments)

Estimated Individual Values and Summary Totals

The report narrative summary will generally only reference the total value for all the assets appraised and refer to this appendix for the itemized detail.

It is not uncommon for clients to request this detail in a separate workable file, so they can better utilize the data as well as transfer it to their internal documents. This is generally acceptable to the appraiser, with the firm understanding that the data itself will not be altered. As long as the appraiser retains the original files, any potential disputes on this issue can be easily remedied.

In summary, when you are considering engaging an equipment appraiser, ensure that these component documents will be part of the overall valuation report and that you are working with an experienced accredited, ASA machinery appraiser.

Every equipment appraisal can be classified as either a desktop or an on-site. A desktop is one in which the equipment is not physically viewed by the appraiser, who instead relies on the client to provide the necessary data required to properly describe, identify and value the property. The on-site option includes the appraiser personally inspecting the assets during the initial phase of the project to obtain all this information directly.

There are pros and cons to each option, and given the circumstances of each project, one may clearly be more preferred, while in other cases, it will come down to a decision based on cost, efficiency, and/or logistics. If the appraiser you’re working with is highly experienced, they can often suggest the better option based on their understanding of the overall scope of work and the asset mix. Either way, both options are reliable, defensible, and supportable, as long as the appraiser obtains the necessary data to get the job done.

Here are a few of the important factors that go into the determination of engaging in a desktop vs. an on-site equipment appraisal:

Quality of the Data Available: Depending on the level of detail provided by the client, and their ability to obtain the necessary specifications and photographs for the equipment, an on-site valuation may be the most effective option.

Number of Assets and Overall Value: Generally speaking, the larger the transaction and the greater the number of assets, the more likely an on-site appraisal would be preferred. There are typically adjustments, such as new assets purchased and older machinery being retired, that don’t show up on the available listings and can be verified on-site. In addition, the higher appraisal fees associated with personal inspections can be better justified in relation to the overall project.

Cost: The travel and expenses of the appraiser getting to the site(s) and spending the necessary time to inspect, take photographs, meet and interview key company personnel needs to be weighed against the benefits. Locality: The ease, or lack thereof, of traveling to the facility. If the business is close to a major city or way out in a very rural environment, may factor into the decision. Spending an inordinate amount of time getting to and from the sites can oftentimes create a cost inefficiency.

Timing: If there is a very tight timeline to complete the valuation, the desktop option may be the only reasonable approach to meet the delivery deadline. Scheduling and executing the on-site work can take anywhere from a few days to a couple of weeks.

Transactional Hurdles: Depending on the client and scope of work, it may be a requirement to include an on-site personal inspection by the appraiser as part of the process. This may come into play with financial institutions, the SBA, litigation cases, business disputes, and tax authorities.

As an appraiser, completing the site work independently results in a better understanding of the specific business application of the assets and allows for greater control over the data gathering process, while providing a hands-on personal experience. However, as long as the information available to the appraiser is of reasonable quality, the desktop option will be more than adequate. In all cases, the machinery & equipment appraiser should be able to guide you through the scope of work process which will ultimately determine the best options for you.

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.

In a recent blog post in early May, we talked about the many reasons a company will need to obtain an updated equipment appraisal to get the most out of a business goal or requirement. One of the primary issues we discussed pertained to traditional bank financing and equipment leasing.

The next step in understanding how these appraisals can work best for your business, we will need to see through the eyes of your bank and leasing company as they determine the right level of value to consider when making investment decisions.

Here are the most commonly utilized values and their American Society of Appraisers (ASA) definitions.

Fair Market Value (FMV)

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.

Orderly Liquidation Value (OLV)

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.

Forced Liquidation Value (FLV)

Forced Liquidation Value is 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.

When any type of financing or leasing is involved, these parties may independently determine which value they would prefer to weigh, and in many cases, they look at all three. Every private and government-owned (ex.: SBA) financial institution has its own internal policies to abide by. What we most commonly see when appraisals pertain to bank financing is that Orderly Liquidation Value tends to be the primary focus. A lot of banks also have percentage tables they are willing to lend from, such as 70% of Fair Market Value or 80% of Orderly Liquidation, for example.

Equipment leasing companies may take a slightly more aggressive stance on valuing machinery & equipment as they are technically the owners of the assets and may have more extensive experience and knowledge in certain industries. A “sale-leaseback” is a common term where the business purchases your assets and leases them back to you under a monthly rental payment plan. This sale may be completed at Fair Market Value and, to offset their potential investment risk, they might collect a security deposit or similar resource as “additional collateral” in the transaction. Any sale back to the business at the end of the lease term is almost always at Fair Market Value.

In any of these cases, I would suggest having the appraiser estimate both FMV & OLV and try to avoid FLV, as this value is akin to an auction, which is at a lower value level, and doesn’t pertain to an ongoing business where your machinery & equipment is hard at work. And as always, ensure the appraiser you hire is accredited by the ASA.