Equipment Appraisal Blog | Understanding Machinery Appraisals

When you own equipment, do you know about how long you can expect to be able to use it? Though most owners know roughly how long their equipment will last, determining a closer estimate is a difficult process. Fortunately, it's a process that is familiar to many experienced and certified equipment appraisers. Here's a quick look at the factors they consider when determining normal useful life in a piece of equipment.

Exactly how do you determine normal useful life in your equipment?

There are a wide range of factors that contribute to the lifespan of a piece of equipment. Here are just a few that are taken into account by a certified equipment appraiser during the process of calculating useful life.

• Environmental conditions. There can be a huge difference in the lifespan of a piece of equipment based solely on the conditions where it is stored and used. Equipment kept in a dusty warehouse with extremes of temperature and a leaking roof will almost certainly have a much shorter lifespan than one kept in a clean, dry workshop with climate controlled temperatures. Why? Moisture and humidity can lead to corrosion, while being used in hot, dusty conditions will lead to early breakdown of lubricants and cause excessive wear. Better conditions lead to a longer useful lifespan.
•  Suitability to the work. If the equipment you're using is underpowered for the work, it will be used at the high end of its range for most of its lifespan. That means it will overheat more often, breaking down lubricants and causing excessive wear on the components. This in turn leads to other parts failing and a shorter overall lifespan than may be expected of a piece of machinery better suited to the work at hand.
• Abusive usage. Is the equipment being used with care to preserve its condition? If it's being used incautiously or being beaten on to work controls, this level of abuse will quickly shorten its overall useful lifespan. As an example, we've all seen heavy equipment that has been bashed, dented and torqued early on in its lifespan, which quickly leads to early failure.
• Expected longevity of that line of machinery. Some brands have a reputation for excellence and longevity that comes into play. For example, a store brand bandsaw with a reputation for poor performance and shoddy manufacturing won't hold up nearly as long as a finely-crafted one that has been well engineered, created from the best materials and delivers superior performance time and again. When the second example is used, you can expect a much longer useful lifespan than you may otherwise anticipate.
• Regular maintenance and repairs. Though it seems like a simple step, regular maintenance in line with the manufacturer's recommendations can help ensure a much longer lifespan than equipment that has been neglected over the years. In the same vein, repairs that are caught early and dealt with quickly will help prevent damage to other components in the system.

Though the process of determining normal useful life in a piece of machinery is difficult, it's one that equipment appraisers are well versed in handling. By knowing when your equipment may fail, you can better plan for replacement and ensure you are still able to receive some resale value out of it. A certified equipment appraiser can help you determine this timeline for your machinery.

If you're thinking about having equipment appraised, you may have heard any number of appraisal types tossed around. One type of calculation that is commonly used is actual cash value. But what is this appraisal type, how is it performed and in what situations is it the best option to consider? Here's a quick look at these questions and how they apply to your machinery assets.

How is actual cash value determined by a certified equipment appraiser?

When it comes to determining actual cash value, many people are a bit confused over how this figure is calculated. It doesn't help that over the years, the court system has defined it in several different manners. Some people think it's the same as fair market value. Others think that it's replacement cost minus depreciation. Others think it's a hybrid of the two.

But what's the difference between these two approaches? Replacement cost minus depreciation can work in some situations, but not in others. A piece of machinery is lost in a fire, and the cost to replace it is $50,000. Depreciation on the original equipment would have been $5,000, so the equipment is valued at $45,000. Using fair market value, the same equipment may be older and fully depreciated. Using replacement cost minus depreciation may only provide a value of $5,000, but if the equipment was well maintained, it may still deliver years of reliable service. At this point, the value of $5,000 may be unrealistic for replacement in a loss.

Obviously, calculating actual cash value is a difficult process, with contradictory precedents depending on the state where the equipment or company is located and where you're going through legal or insurance issues. Despite the vague definition of actual cash value, many legal, financial, tax and insurance organizations still use it, leading to potential disputes between the customer and the company. Hiring a certified equipment appraiser to provide you with an appraisal report on the actual cash value of your equipment can help your side of the debate. 

In a number of court cases, the report or testimony of a certified equipment appraiser has made all the difference between a poor value and a fair value for equipment. A certified appraiser goes through an extensive educational process that includes learning which appraisal methods are applicable to which situations. Because they are taught proven methodologies that have been tested in legal, financial, insurance and tax circles, the reports they generate hold up well to scrutiny and are considered more reliable and accurate than a number of other sources you may be tempted to use in your situation.

A certified appraiser has the knowledge, experience and ability to help you fight a poor estimate of actual cash value. They've been trained to know in what situations different rules must be applied to determine a fair value for your equipment. When you work with a certified appraiser, you'll realize significant benefits for your machine values.

When you have actual cash value calculated on your equipment, you're gaining good insight into what your machinery is worth. However, if your appraisal isn't performed by a certified equipment appraiser, you may not be getting accurate information or an appraisal report that will hold up in financial, insurance, tax and legal circles. Make sure the appraiser you use is certified to ensure that your documentation will stand up to strong scrutiny in the future.

When you're buying a company, one of the last things on your mind may be equipment appraisals. What does a machinery valuation matter compared to profit and loss, equity and overall assets? If you ask any equipment appraiser, they'll tell you just how important equipment values are in your business' bottom line. Here are a few reasons why you'll want to see a machinery valuation before you sign on the dotted line.

Why do equipment appraisals matter when you're buying a company?

• They represent actual assets and equity rather than paper assets and equity. When a business is preparing its tax documents, machinery is often depreciated on a specific schedule. But in the real world, there are a wide range of factors that can impact how long the equipment can remain in service without compromising your profitability. A completely depreciated piece of equipment can continue working for years to come, while one that has had rough treatment or that is of poor quality may give up the ghost years before it would be completely depreciated on a standard schedule.
• They give you a better idea of the condition of the machinery you need to operate your new business. Part of the process can involve looking over the maintenance and repair logs giving you insight into whether the machinery has been properly maintained to deliver years of service or if it is in poor repair, which may require negotiating to a lower sale price to compensate for equipment that will need to be replaced.
• They help you plan for costly repairs or replacements down the road. An appraisal might contain the estimated normal and remaining useful lives on the equipment. This allows you to plan for these repairs or replacements long before they're needed so you can have the financial resources in place that will be needed.
• Equipment appraisals can also be completed at the "Replacement Cost New" level which would give you insight on how much would go into replacing something if you had to buy it new.  This might be helpful when setting up your new insurance policy on the business that you are buying.

Equipment valuations may take a small part in the overall view you get when you're buying a company, but it can give you a solid view of the business from an asset perspective. But just as important as getting an equipment appraisal is the equipment appraiser who does the analysis. Hiring a certified equipment valuation specialist ensures that the calculations of the equipment values are determined by someone who has learned the appropriate methodologies for any number of different situations. This ensures the equipment values they calculate will hold up to strong scrutiny and will help you with obtaining financing, covering insurance losses or fighting a bad tax assessment.

We've all had it happen. Sitting abandoned in a random corner of your facility was a piece of equipment that was worth some serious money, but you didn't realize its value at the time. Alternately, you held on to equipment on the incorrect assumption that it was worth a lot, just to find out that because it was taking up vital production floor space, it's actually been costing you money to keep it. How do you figure out which equipment you should keep and which you should get rid of? It's all part of why understanding fair market value of your equipment is so important. Here are some basics to get you started.

It's worth what? Why understanding fair market value is vital to your company's bottom line

What effect does fair market value have on your business? Why is it important to get an equipment appraisal to know exactly what your equipment is worth? There are a number of reasons for having an equipment valuation specialist perform an appraisal to determine your equipment values. You could be considering selling or donating equipment and need to know what it is worth for a tax deduction. Maybe you've had a fire or disaster at your business that has destroyed some equipment and you need to make an insurance claim. A tax assessor could have made an appraisal that you're not sure is accurate and may cost you more in property taxes than the equipment is actually worth. How do you determine the fair market value of your equipment to ensure you have an accurate picture of what your machinery is worth? 

But why can't you just use your tax documents for these purposes? The value of your machinery in your tax documents is often very inaccurate. A standard depreciation table takes your original machinery cost and removes value over a set period of time. If your equipment happens to fall within that particular time period and becomes unusable or without value at the end of that depreciation period, a standard depreciation table works.

However, when your machinery is used hard and fails before the end of the depreciation period, it will show value that is in excess of what your equipment is actually worth. And almost every business has ancient machinery that still provides reliable service, even though it has been fully depreciated for years, providing value that may not appear on your tax documents.

You could also get an informal equipment appraisals from an equipment dealer, but you need to keep in mind the viewpoint of the dealer. They're there to make money selling equipment, not performing appraisals. They may undervalue your machinery to try to convince you that it doesn't have much value or they may overvalue it to encourage you to use it as a trade in on new machinery. Neither of these situations will provide you with an accurate machine value.

By keeping track of your business' assets and understanding fair market value and its impact on your business, you can ensure that you're holding onto only the equipment that boosts your company's bottom line instead of causing problems down the road. But how do you determine the fair market value of your equipment and track it as situations change? A qualified equipment appraiser can go a lot way to helping you through the process.

He said, she said, they said - when it comes to dealing with a divorce, it's a very stressful time. The last thing you may be thinking about is getting equipment appraisals performed on your machinery assets. But when both parties are in a business together or if one party is contesting the divorce, you'll need to have a certified equipment appraiser take a look at what you have and prepare a report that will hold up in court. What's more, you'll need to have a particular type of machine appraisal performed to meet legal requirements. Confused? We'll help you figure it out. Here's what you need to know:

Before You Sign on the Dotted Line: Why Equipment Appraisal is Vital in a Divorce

Why Get a Certified Machinery Valuation?

A machinery valuation helps determine the value of equipment assets during a divorce. But what many people do not realize is that the type of appraisal is different depending on the situation. There are some legal restrictions, depending on your location, that control the type of appraisal that must be performed in a divorce. But beyond the type, you'll want to make sure your appraiser is certified. Why? Certification shows that the appraiser has been trained in standardized equipment appraisal techniques and types, ensuring they'll know how to apply the proper methodology to your equipment appraisal.

They'll also be a neutral party, providing a fair value for your equipment. If your appraisal report is not prepared by a certified equipment appraiser, it will almost certainly be contested or thrown out in court during proceedings. Even if your appraisal was performed by a certified machine appraiser, your spouse may choose to contest the report either out of an abundance of caution or out of spite to drag out the proceedings or force your hand in another area. In that situation, it's vital that you work with a certified machine appraiser who has experience as an expert witness.

What Type of Valuation Do You Need?

Beyond making sure that your equipment appraiser is certified, you may not realize that the law in some areas controls what type of appraisal can be used in divorce proceedings. Fair market value is typically used, with both parties agreeing to use the same independent certified appraiser. If one partner is pushing to get out of the business, fair market removal value may be used, which accounts for the cost of removing permanently-affixed machinery from a business location. In cases where both parties want to quickly leave the business and have the cash to start over, orderly liquidation or forced liquidation values may be used to speed the process along. Though this is relatively rare, it does show up in no-content divorces where neither party wants to retain an interest in the business. 

Though nobody wants to go through a divorce, knowing what's involved in deciding what to do with equipment assets can help a great deal. Remember, you'll want to work with a certified equipment appraiser to ensure your appraisal report will hold up in court and against legal scrutiny.