Equipment Appraisal Blog | Understanding Machinery Appraisals

Equipment appraisals rely on having accurate asset data; however, there will be situations where an appraiser must work with incomplete or uncertain information. In such cases, extraordinary assumptions can be used to move the process forward. Understanding when and how to use and disclose them is vital to producing a credible report, compliant with the Uniform Standards of Professional Appraisal Practice (USPAP).

According to USPAP, an extraordinary assumption is defined as “an assumption, directly related to a specific assignment, which, if found to be false, could alter the appraiser’s opinions or conclusions.” These assumptions are typically declared when they are needed to fill in certain gaps in asset data that are unknown or undocumented.

For example: The appraiser is unable to inspect certain machinery, and the client cannot provide sufficient specifications such as model numbers, years of manufacture, hours, or mileage. Disclosing an extraordinary assumption allows the appraiser to proceed based on what is believed to be true.

Another scenario would be if the equipment is decommissioned or in storage, the appraiser may need to assume it is still in normal operating condition to estimate value based on comparable functioning assets.

Using extraordinary assumptions helps the appraiser complete an assignment under real-world limitations. Properly applied, these assumptions will maintain transparency, alert the reader to potential limitations in the opinion of value, and ensure the appraisal complies with USPAP standards.

An accredited valuation expert with extensive experience in the valuation industry and who is familiar with many different types of machinery and equipment can often rely upon past assignments and sound judgement to reasonably make these types of assumptions. It is important to obtain as much historical background perspective as possible from the owner or operator of the assets to develop a comfort level that the assumptions being made are logical.

In summary, extraordinary assumptions are a practical tool in equipment appraisal, but they must be used with care and professional judgment. When information is uncertain or unobtainable, these assumptions allow the appraisal to continue, provided it is made clear what is being assumed and why. Ultimately, it is about balancing practicality with responsibility.

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.

Image source: Aqua Mechanical on Flickr license

I have heard and used this phrase many times over the years when people are discussing the topic of quality vs. price in both everyday life and business. It is a commonplace belief that the more you pay for something, the better the product or service will be. While there are always exceptions to this axiom, where services are concerned, the fact is that higher quality costs more since it requires experience, integrity, and expertise.

I have personally learned this to be true from my experiences working with sub-contractors, landscapers, tree care companies, accountants, attorneys, even my personal and pet groomers. From a consumer product perspective, it is more of a challenge to compare price vs. quality, given the broader competitive marketplace. There are many reliable, less expensive options out there, however, you should still consider paying a bit more to get the best quality for your hard-earned cash.

The bottom line is twofold:

Make the decision ahead of time that you want the best there is to offer and; research potential candidates to fully flesh out who can deliver as promised.

As machinery & equipment appraisers with decades of experience and the best accreditation the industry provides, we know the cost to engage with us will not be the least expensive option when you are in need of valuation services. We lose out on some opportunities every day because our cost structure will never compete on price with less experienced appraisers who lack the credentials and ability to provide a quality service and product which, ultimately, will be deemed unreliable to both you and any third parties involved in the transaction.

In all markets and industries, both personal and business, these high-to-low-end service options are available to everyone.

In the valuation industry, the “get what you pay for” difference revolves around working with a machinery & equipment appraisal firm that is extremely responsive from beginning to end, and becomes a partner who best understands your goals in the overarching problem being solved. From the scope of work discussion to engagement, to report delivery and consulting, these products and services are of unparalleled quality when compared with any other option out there.

Once you have determined this type of relationship is the one you want to be involved with, please reach out and let us know what we can do for you.

By now, most people are aware of the supply chain crisis and its impact on many parts of our lives, both personal and business. Facing some of the worst of these issues are international importers and exporters who are experiencing unprecedented increases in product costs associated with purchasing, shipping, handling, and significant delivery delays.

From an appraiser's perspective, questions have arisen regarding the impact of this global problem when it comes to valuing the equipment, personal property, and inventory of the assets for these businesses.

Historically, appraisers have largely been engaged to assist in the customs process, which requires an appraisal on property being shipped overseas. While valuation companies are still involved in this area, the overall marketplace and the effects on both new and used machinery & equipment, as well as how long this crisis might persist, is the more prevalent topic today.

Supply chain issues are affecting other businesses on varying levels as well. A good example is the automotive industry. The new vehicle shortage they are experiencing has led to a sharp increase in prices for both new and used cars and trucks. Delivery delays are also causing significant price increases at grocery stores, furniture retailers, building construction firms, manufacturing companies, and others.

When valuing machinery & equipment in these markets and industries, an appraiser will research and analyze each situation, and determine a reasonable approach to measuring this impact, especially if they believe these supply chain issues are going to continue well into the coming year. Given the uniqueness of this situation, this will likely involve a subjective opinion from the appraiser based on the information uncovered, the level of change from more normal conditions, and the short or long-term effects this will have on the market and the assets involved.

When the need for an appraisal occurs in your import or export business, ensure that you engage with an accredited or certified valuation expert with the experience required to deliver reasonable and supportable opinions.

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.