Equipment Appraisal Blog | Understanding Machinery Appraisals

It's a straightforward principle. When you're willing to invest more in something, you should expect a superior product or service in return. You can find a reputable and proven commodity that will undoubtedly stand out by conducting thorough research into the providers of these higher-priced goods and services. This process ensures you're getting the best value for your money and instills a sense of security and trust in your decision.

The decision-making process can be daunting, from service providers, such as appraisal firms or home improvement contractors with extensive experience and premium fees, to consumer products where you need to balance price and quality. There are always cheaper options available. However, by choosing to prioritize quality over cost, you can find the best quality items for your investment, leading to a sense of satisfaction and fulfillment with your choices.

Before you start reviewing options, decide ahead of time that you want the best there is to offer. Then, research potential service provider candidates or product manufacturers to fully flesh out who can deliver as promised.

As business and equipment appraisers with decades of experience and the best accreditation the industry provides, we know the cost of engaging with companies like us will be the more expensive option when you need valuation services. We lose out on opportunities every day because our fee structure can't compete with less experienced appraisers who lack the credentials and ability to provide a higher quality service and product in the form of an accredited report.

In the valuation industry, or any type of service, the decision to go with the best available, higher-cost option revolves around vetting several firms and determining who you believe will be the most responsive from beginning to end while working with you to understand your goals in the larger transaction or dispute being resolved. From scope of work discussion to engagement to report delivery and consulting, these services should be unparalleled in quality to any other option out there.

Once you've committed to working with these service providers or decided that you prefer to purchase the best products on the market, you can begin the process and ultimately be very satisfied with your choice.

After almost 40 years of working in the machinery and equipment markets, I find it fascinating how so much has changed but many things remain the same. Whether it involves financing and leasing, asset management, buying and selling, or independent valuation, the methodologies and mechanics of these industry sectors working together to be successful have been consistent for decades.

From an appraisal perspective, you don’t need to be an expert in any one type of market or industry to estimate value effectively. The principles and methodologies learned and practiced within the M&E appraisal profession do not change as the asset types vary. Gaining experience and developing a sound and supportable technique for appraising is the key to becoming a well-regarded appraiser.

Here are a couple of topics to think about that might help you along the way as you continue to develop your valuation skills and expertise:

Initial Information Gathering:

Obtaining the details behind the equipment you are appraising is a critical first step in providing a credible appraisal. Variables such as the year, make, model, serial number/VIN, hours/mileage, original cost, and any relevant specifications and documentation are all important to obtain. Communicate with the current owner to gain a basic understanding of the history of the machinery and gather any detailed itemized listings and support data that might be available.

Gather a Broad List of Sources

During the research process, try not to put too much weight on any one source when it comes to estimating value. Multiple perspectives from varied market sources can provide you with a balanced amount of information that you can review to ultimately form your own opinion. Remember that this is your appraisal, not simply a parroted version of someone else’s.

Don’t Rely on One Approach

From my experience, it is beneficial to consider and weigh the appraisal from both the Cost Approach and Sales Comparison Approach. Regardless of how much resale data might be available for any piece of equipment, it is also beneficial to understand the new replacement cost, useful life, and typical market levels of depreciation and obsolescence that occur with machinery and equipment. Combining the elements of both approaches can create a check and balance type system for your analysis and provide a sanity check to all the data gathered.

Like anything else in life, experience is gained by doing, and each year you can continue to hone your skills to become a better equipment appraiser.

An accredited independent machinery & equipment appraisal needs to rely on several variables, utilizing components of both the sales comparison and cost approach to fully flesh out a balanced estimate of value. Researching and reviewing a reasonable amount of market sources that provide useful information is paramount to effectively working through an appraisal; however, it is common that all the pieces of data won’t consistently line up or even make logical sense in some cases.

An appraiser must understand that these market sources, while very useful, might not be entirely reliable and may even have a level of bias associated with them given the business and industry they operate in. A vital role of an accredited appraiser is to sift through the information they uncover and determine how best to put the pieces together to arrive at a conclusion of value.

This is where the level of experience an appraiser has comes into play. Determining which sources appear most consistent and reasonable, as well as making some commonsense decisions on how the particular assets being valued should trade in a secondary market throughout their useful lives will shed light on the situation.

There may be times when the equipment to appraise is very uncommon, with virtually no secondary market information available to research. In other cases, the appraiser will have dozens of sources available to them, each one marketing similar machinery for sale with a wide array of differing price points. Each situation will present challenges regarding how best to work through it and arrive at a reasonable assessment.

The purpose of the appraisal and the premise of value being estimated will also create different approaches that need to be thought through while completing the analysis. How an appraiser adjusts to each situation is based on their experience and overall understanding of the bigger transactional picture they are involved in.

The conclusion of value is ultimately the appraiser’s determination and theirs alone. The sources they rely upon are not responsible nor are they the ones being compensated to provide an independent estimate.

An opinion is always going to have some degree of subjectivity behind it, regardless of how much data supports it, and that’s okay. The more knowledge and experience an appraiser has backed up by a reasonable amount of supporting data, the better the final outcome will be.

When it comes to expert valuation assignments, a combination of objective independence and subjective opinion must occur to fully analyze the data compiled during analysis to determine a realistic conclusion. This is especially true with machinery & equipment appraisals, as multiple sources are typically utilized, the sum of which provide varying degrees of information.

There is no question that experienced appraisers with certifications and accreditations to their name must be 100% objective in providing their work with no bias or influence from any third parties. This is the fundamental foundation of the valuation industry and cannot be argued against.

That being said, an appraisal is an estimated opinion of value, and opinions are inherently subjective, regardless of the number of sources and documented information the opinion is based on. This is where the experience of the appraiser becomes critical to the reliability of the value assessment itself.

Taking this a step further, the source material an appraiser researches, reviews, and relies upon will likely have potential gaps, flaws, or opinions tied to the data, which the appraiser must make sense of and determine how best to correlate the information into a final conclusion.

In the machinery & equipment markets, data will be available in the form of listings, databases, and third-party opinions from those that manufacture, buy and sell in the industry. Depending on the commonality of the equipment, this will either be in abundance or in a more limited capacity and in either case, should be considered and weighed. Industry benchmarks and trends, such as those published in the Bureau of Labor statistics, news articles, and related sources, are other points of reference.

All of this data cannot be taken at face value for any number of reasons. Are the available listings consistent and reasonable? Are the database sources full of gaps from a lack of prior sales data? Are the opinions from third parties biased in their own right? Do industry trends focus directly on the equipment being valued?

It is eventually the appraiser’s role to sift through all this information and arrive at a common sense conclusion using their own experience and ability to put the pieces together, many of which may not be a perfect fit. This process is what separates the established valuation experts from the rest of the pack. Subjectivity will always be a component of an appraisal, regardless of the number of sources you rely upon. Being able to establish confidence and credibility with your opinions, thus making them valid and supportable, is one of the most important roles of a professional appraiser.

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.