Equipment Appraisal Blog | Understanding Machinery Appraisals

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.

When you are looking to find an equipment appraiser who can provide a high-quality level of service, how do you know who to select? These types of valuation firms provide tangible personal property and machinery & equipment appraisal services to businesses and individuals across a broad range of markets and industries. The best of these are experienced, reliable, and communicative, while able to support their methodologies and conclusions should the need arise in any business transaction or dispute.

Here's a look at how equipment appraisal firms operate and what is required to be considered a reliable and credible business:

How Equipment Appraisal Firms Operate

Though many companies and individuals purport to be qualified equipment appraisers, only those that have gone through the proper training and education while developing a high level of experience over time can properly call themselves one. Commonly called M&E (machinery and equipment) appraisers, these companies should be able to accurately value virtually any tangible piece of property that would not be considered real estate (land and buildings).

High-quality M&E appraisers have a strong understanding of the variety of situations where appraisal services are required, including litigation, finance and leasing, tax appeals, risk management, insurance, buy/sell, merger & acquisition (M&A), accounting, donations, and any other situation. When that understanding is combined with their accredited expertise you have found a firm well worth your consideration.

Independence and Lack of Bias

Why is hiring an M&E appraisal firm a better choice than engaging a company that performs appraisals as part of a dealership, auction company, or similar business where sales is also a component of the operation?

One of the biggest factors to take into consideration is complete independence of anything else that may be going on in the overall business transaction for which the appraisal is needed. An independent machinery & equipment valuation firm should perform appraisal work and nothing more. If the company you hire is also involved in buying and selling equipment or investing in businesses that do so, they will potentially have a secondary agenda that would create some bias and lack of independence in estimating value.

Proper Education, Experience, and Accreditation

Highly qualified appraisers go through a rigorous process of education and testing while being required to have a minimum level of experience before they can be called an accredited M&E appraiser. This ensures they will use the appropriate methodologies and techniques when appraising your machinery & equipment. The most highly recognized organization that provides this level of training is the American Society of Appraisers (ASA). Other, more specialized groups also have educational and training requirements that can provide some of this experience, however, the ASA accreditation is the most highly sought-after title for any true appraiser.

Should the need arise where the appraisal report may be reviewed or entered into court in support of a business dispute, this accreditation will be an important qualification as well as the overall experience of the appraiser.

In summary, Equipment Appraisal Services hires only ASA accredited valuers as part of our organization. We look forward to speaking with you further when the need arises to have an independent tangible personal property or M&E appraisal completed for your business.

Your oilfield machinery is a primary driver behind the success of your business. You haven’t considered how much your assets are worth in quite some time, however, you now need to update your insurance coverage, obtain refinancing, buy or sell some equipment or even purchase a new company to keep up with growth requirements. Understanding the current market value of your oil and gas equipment is critical for all these possibilities. Obtaining an independent valuation from an experienced accredited appraiser is equally important to you and the other parties involved in the transaction.

Factors Considered in a Fair Market Value of Oil and Gas Equipment

• Physical Deterioration: An appraiser will review the equipment, taking note of its physical condition. The old adage about never judging a book by its cover applies well to machinery appraisals for oilfield equipment. Even if an oil rig looks old and shows visible wear and tear, it is not necessarily an indication of low value. Appraisers will review the history of the equipment with you before making a value determination. Machinery that has been well maintained, with components replaced as needed, regardless of age, will likely still have significant value.
• Replacement Cost: An appraiser will estimate how much it would cost to purchase, for example, an equivalent rig, mud pump, or service truck new, and then deduct from this cost-based typical levels of market depreciation over time.
• Useful life: The appraiser may estimate the useful life of the machinery by reviewing the age, physical condition, and depreciation of equipment. Effective age is typically weighed more than chronological age if the equipment has been well maintained over its life.
• Market Data: The marketplace is where all relevant information is found during the appraisal process. We will look at recent sales and listings while gathering opinions of value from third parties who buy and sell new and used equipment every day.

Appraisers will factor all of these variables into the analysis and subjectively estimate value based on their opinion of the reliability of the data. The appraisal report will summarize this process, explain the criteria under which fair market value was determined, and provide the sources relied upon to support these conclusions.

If you are considering any business plans in the immediate or longer-term future where the value of your oilfield assets is a factor in the decision making, it is well worth the time and expense to engage an independent appraisal company to complete the task. It is important to hire an appraiser who is unbiased and experienced in the valuation of these types of assets. When your business is on the line, never settle for an appraiser who doesn’t have the right credentials or may have an interest beyond appraising your machinery. Equipment Appraisal Services is the perfect place to begin your search.

You have spent years building up your business, invested wisely, accounted for risk, and sacrificed a lot to build your company into what it is today. You have groomed the next generation of your family and employees to one day take over the legacy you have created.

If you own a significant amount of machinery & equipment as part of your business, have you accounted for gift or estate taxes in your planning? With the potential liability of these taxes, failing to plan for them can leave your legacy open to unnecessary costs. You can avoid this pitfall by obtaining an accredited machinery & equipment appraisal with signed certification that attests to an objective, fair opinion of value.

Whether you are planning on handing down the business or just need to update the current value of your tangible machinery assets for internal or external purposes, a documented appraisal report will satisfy several needs. It can assist in limiting any disputes in value by those taking over the business, where one family member, partner, or vested employee thinks they are getting more or less than another. If your estate and it’s associated company is being divided up between several people, an accredited equipment appraisal will help determine how all the assets can be equally divided. If you are planning on using a living trust, it also has the advantage of keeping your loved ones out of probate and will keep your accounting and wealth private.

Making Arrangements for Estate and Gift Taxes

When you have a supportable, independent equipment appraisal report in hand, you can then estimate how much these burdensome taxes may be and make allowances for them either through life insurance, business insurance, or by leaving a certain amount of equity available to cover these estate costs.

If you are thinking of estimating these values internally by simply looking for similar equipment online or finding a broker, auctioneer, or other unaccredited third parties to estimate value, you risk not having an objective, reliable report. This may cause concern by those auditing your business for estate tax purposes.

Make sure you employ accredited valuation experts who are members of the American Society of Appraisers (ASA). This ensures they follow the protocols of providing objective, supportable reports that will hold up in any business situation.

Did you know that over one-third of businesses that go through a disaster or property loss never open their doors again? This is primarily due to insufficient insurance or the inability to prove the value of equipment and other assets lost in the event. How do you protect your business against this kind of unexpected problem? An accredited equipment appraisal with a signed certification can go a long way towards ensuring you have adequate insurance to protect against a loss and to support equipment values during an insurance loss settlement.

Involved in an Insurance Loss Claim for Machinery & Equipment? Accredited Appraisals Will Assist in the Process.

Determining Insurance Coverage

When you are buying business insurance, you want to make sure all your assets, including machinery & equipment, are being covered for their current market or replacement cost value. Many people rely on tax return depreciation as a quick guide to appraising it, but the actual value may be much different than what standard accounting depreciation allows.

If the machinery & equipment is overvalued, you may be paying too much for premiums and will not recover the full amount you have estimated during a loss claim. If the assets are undervalued, the insurance company may have concerns that you did not pay for sufficient coverage and not be willing to pay you a fair value for casualty claims. An accredited machinery & equipment appraisal can go a long way to providing proof of value for your assets and assist in determining how much coverage you need.

Dealing with a Loss

When your business suffers an actual casualty loss, during this stressful time, you will want to reach a fair settlement as quickly as possible, to avoid business interruption. Can you prove what your equipment was actually worth? Having support documentation completed by an accredited machinery & equipment appraiser with signed certification helps to prove the real market value and can be utilized in an insurance settlement. The valuation is an objective, unbiased, defendable report that you can present to the insurance company during the claim process.

Even if you have not had a report completed before the loss, appraisers can retrospectively value the machinery & equipment as of the casualty loss date. An accredited equipment appraiser will sign a certification attesting to the value as of the prior loss date. They have the experience and expertise to research the market and make the appropriate adjustments to reflect market value as of the effective date. Make sure the firm employs accredited valuation experts who are members of the American Society of Appraisers (ASA). This ensures they follow the protocols of providing objective, supportable reports that will hold up in any settlement negotiation.