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.

When you're considering the dissolution of partnership, a corporation or a marriage, you're often dealing with parties that have their own interests at heart rather than in the interest of the business. The person leaving the union wants to get the best possible price, while the individual that is remaining wants the lowest possible price so they can pay it off and continue to operate the business as best they can. How can both sides be dealt with fairly? One way to start down the right path is to use the proper valuation method for equipment values.

How a Machine Appraisal Helps During a Dissolution of Partnership

As part of the larger business appraisal process, a machinery appraisal provides you with a good idea of what equipment in your company is worth. If you base your business' value on the value of its assets, using tax records that depreciate machinery using a standardized table can give you an incorrect value. If your machinery is in particularly good condition, a standard depreciation can undervalue your equipment, giving the partner who is leaving less than the partner who remains. On the other hand, if the machinery must be used hard or in poor conditions, the standard depreciation may estimate too high a value, providing more money to the partner leaving and leaving the remaining partner without sufficient assets to keep the business in operation successfully. 

Methods of Appraisal During Dissolutions

Fair Market Value

When appraisals are performed for the sake of a dissolution, the most common method used to value equipment is based on fair market value. This is a value determined by a qualified valuation specialist based on the condition of the equipment and the market at the time of sale. It is often considered the most equitable way to determine value when a piece of equipment is to remain in production after the dissolution is completed.

Fair Market Removal Basis

But what if the parties want to sell off the machinery or assets? If there is at least some amount of time before the dissolution, there may be time to sell the equipment piece by piece. Fair market removal is the fair market value minus the cost of removing the equipment from the premises.

Liquidation Value Basis

When both parties want to dispose of all assets quickly and then divide the funds from that sale, liquidation value is used. This will provide the lowest possible value, the value raised during a fast liquidation where there may not be time to find an optimal buyer and the sellers will settle for the scrap value of the assets. 

Other Basis for Valuation

In some situations, such as a divorce, there may be legal requirements to the type of valuation basis used to determine equipment values. In these situations, having an equipment appraiser who is familiar with the law and who will provide the legally required valuation basis is important.

Dissolution of partnership is never an easy process, but having a qualified equipment appraiser provide you with a machinery valuation can help ensure that everyone gets a fair shake out of the deal.

When you work with a machinery and equipment appraisal company, what will the equipment appraiser look at during the material handling equipment appraisal process? From the tread on the tires to the demand in the market, there are a wide number of factors that play into the final equipment values that are reported. Here are some of the areas that a machine appraiser looks at while conducting a material handling equipment auction:

Areas Considered in a Material Handling Equipment Appraisal

• How old is the equipment? Though you might consider that to be a primary concern when you're having a machine appraisal performed, there are actually a lot of other factors that often weigh more heavily into the machinery appraisal than age. A machine only a couple years old that has ben abused or ill-maintained may command a much lower valuation than a ten-year-old machine that has been well maintained and has a variety of features that work well.
• Is the equipment manufactured by a well known or unknown company? It's much easier for a repair to be made to a piece of material handling equipment that is from a major manufacturer with readily-available parts compared to an imported knock-off that requires speaking a second language to deal with their parts department or the chance that said parts will clear foreign customs. This is reflected in how much people are willing to pay for a piece of machinery.
• What is the condition of the equipment in terms of maintenance and repair? If a machine hasn't been well cared for, it will have more problems in terms of repairs and a shorter lifespan, which is reflected in its appraisal value. Keeping a log of repairs and maintenance on each machine helps show that due diligence has been used in keeping the machinery in the best possible condition.
• How does the equipment compares to similar equipment in terms of wear and abuse? Beyond simple repairs and maintenance, this speaks to whether dust or debris has gotten into the machinery, causing higher levels of wear than would normally be seen in a similar machine. Other signs may include scrapes, dents or sloppy repairs that may not hold up or compromises the machine's safety features..
• What features does the equipment have? Much like an upgraded car, a piece of machinery that has good quality features that build value into the machine and helps save time, materials and effort will fetch a better price on the market, which is reflected in the final equipment valuation report you receive. A machine with only the basic features or poor-quality features that are broken or don't perform as planned will usually fetch a lower valuation.
• What is the purpose of the appraisal? Appraisals can look at many different situations, from the sale of a company to the simple sale of assets during a bankruptcy. Knowing what the purpose is helps the appraiser understand what type of qualities need to be studied during the appraisal.

But this information doesn't apply only to having equipment appraisals performed, it can also be used when selecting equipment that is more likely to hold its value in the future. If you're still looking for equipment appraisers to provide a material handling equipment appraisal for your company, please contact us. Our appraisers are accredited through the American Society of Appraisers.

Long days turn into sleepless nights when the business you own is in danger of failing. The thought of filing for bankruptcy is never a pleasant one, but it is an option that must be considered. Many manufacturing companies borrow heavily to obtain the machinery and equipment that is essential to the operation of their business. When business is good and everything goes according to plan, there is no problem servicing the debt. When debt goes from manageable to something worse, you can not procrastinate. It is time to act. It is time to call in a skilled equipment appraiser and get a bankruptcy asset appraisal.

Discharging or Reorganizing Debt Requires Proof

Whether you are planning to disband your business and file for a discharge of all debts under Chapter 7, or are trying to reorganize and resurrect your troubled business through a Chapter 11 filing, you need to establish your machinery and equipment values. One of the first and most basic steps in any bankruptcy filing is to list your assets (and liabilities) and indicate their estimated worth. If the bankruptcy court does not agree that your liabilities substantially exceed your assets, your case may be dismissed.

Get a Machinery and Equipment Appraisal Before you File for Bankruptcy

Before you go to the expense of hiring an attorney and filing a case, it makes sense to know exactly where you stand. Maybe you underestimated the fair market value of your machinery and equipment? Equipment value can be the biggest asset of your company.

If you lease the equipment and machinery that you use, it is not normally recorded as an asset of your business. If the lease contains a clause that allows you to purchase the equipment or machinery at a specific time for a specific price, the lease may have some value. Here is an example of how an equipment lease can have value.

Suppose you signed a 10-year-lease for machinery that cost $200,000. Further, your lease had an option to purchase the machinery for $20,000 at the end of the lease. When the lease is up, a machine appraiser may assign a machine valuation of $50,000. If that is the case, you have an asset worth $30,000.

Even if you are still paying the bank or finance company that loaned you the money to buy your equipment and machinery, you may still own a valuable asset. The difference between what you still owe to the finance company and the fair market value is the equity you have in your machinery or equipment.

Accurate equipment or machinery valuation can reveal a large, non-cash asset that can be used to borrow cash and pay off creditors. If you can use your machinery and equipment as collateral to raise working capital, you may be able to avoid bankruptcy and get your business back on track.

Equipment Appraisals Help Attorneys do their Job

Attorneys that practice bankruptcy law have a number or responsibilities that require an accurate estimate of a machine or piece of equipment's worth. Before you actually file a case they need to know all of your company's assets and liabilities so they can advise you whether or not it is prudent to pursue relief through the courts. Then, they have to prepare documentation (attach a machinery and equipment appraisal) for the court to review.

Business bankruptcies can be complicated and it always pays to be well prepared with facts an figures. Part of that preparation is getting your machinery and equipment professionally appraised.