Equipment Appraisal Blog | Understanding Machinery Appraisals

Machinery & Equipment valuation relies in part on understanding the new and used trade markets and developing an analysis that reasonably reflects what the subject assets being appraised would be worth in those markets. Before you even start to investigate this research, an early component of an M&E appraisal work effort involves the receipt of detailed data from the client that clearly identifies the machinery, including specifications and purchase history.

The additional perspective an appraiser receives by obtaining this data at the beginning of the engagement has many benefits. It saves the appraiser time by having them recreate this information themselves and allows them to price the valuation more competitively, given the time saved by performing this task themselves. Asset history provides specifics about the machinery being valued, which builds the foundation for the appraisal.

Every piece of equipment is different in its own way. The specifications, hours, mileage, usage factors, as well as upgrades and refurbishments completed at certain points in time, will all factor into the ultimate conclusion of value.

Knowing the original purchase price of the machinery, even if it was several years ago, will assist in reasonably verifying that the replacement cost estimates you determine are accurate. Appraisers cannot blindly assume all the independent market information they uncover is 100% bulletproof, as sources can be limited or inconsistent across multiple market sellers.

This is perhaps the biggest challenge in the equipment industry. Unlike business valuation, where databases and historical financial data are available and consistent in form, and real estate, where published comparable property resale data is more definitive, equipment market data can be erratic and full of gaps.

You will commonly see the same makes and models of equipment, with virtually identical specifications and usage, listed and selling for vastly different prices. The auction marketplace, which reflects billions of dollars of used equipment sales annually, experiences varying levels of demand, leading to less reliable data with a wide range of price points.

For every valuation assignment, consider performing a direct and/or indirect cost approach, which can be developed from the historical data provided by the client, as well as research into new equipment pricing in the market. This perspective will provide additional support and complement the market approach, ultimately determining a reasonable and supportable value for the equipment.

Like many jobs, a combination of educational qualifications and hands-on experience should create the most reliable professionals who can be trusted to be efficient and effective in their work. Whether you have trade or manufacturing skills, are in retail sales, or provide consulting services, the more schooling, training, and on-the-job performance you have, the more accomplished you will become.

Appraisal work falls into the service provider category, and in addition to these qualifications, requires a high level of ethical understanding and impartiality to create value-added for their clients. With the focus on these requirements, the educational component for an appraiser is not learned in high school, undergraduate, or graduate school, but is part of an overall technical training program provided by reputable industry organizations such as the American Society of Appraisers (ASA) and the National Association of Certified Valuators and Analysts (NACVA).

Although many appraisal companies are affiliated with these types of organizations, it is incumbent upon the individuals within each business to personally acquire the educational training and credentials they offer. Once the initial certifications or accreditations are granted, there are continuing educational requirements to maintain them over one’s career.

From an experience perspective, the highest-level credentials are generally not earned until 3-5 years after an individual begins working as an appraiser. If less experienced employees are involved in a valuation project, the final reports submitted to clients should have a signed certification from the senior appraiser who would be responsible for the results of that assignment.

If you need an independent appraisal, it is important to ask the companies you are considering exactly how the assignment will be handled. Ensure that a senior-level valuation professional will be managing the project and directly involved throughout the process. Without the proper credentials and experience behind the work effort, you may end up with a less than reliable report.

Education, training, and experience are the keys to becoming adept at most things in life. The appraisal industry is no exception. To learn more, contact a reputable valuation professional who can provide additional insight on the topic.

At the lowest end of the machinery and equipment valuation spectrum are two concepts tied together by the mere fact that they estimate value at the end of an asset’s life: Salvage Value and Scrap Value. You might think they mean basically the same thing, however, there are distinct differences between them which are important to understand.

When a piece of equipment reaches the end of its useful life, the owner has options with which to determine the disposition of the machine. Does it make sense to reinvest capital to replace major components and refurbish the asset or is the additional money needed too high in comparison to replacing it with a newer one? If the decision is to purchase new and retire the older model unit, then the discussion of salvage and scrap value comes into play.

Assuming there remain a number of useful parts or components that can be resold with the machine or removed and sold separately, then salvage value can be estimated by reviewing what remains and adding it all up. If the machine is beyond this stage, where excessive usage over time has left nothing to salvage but the weight of the metal, rubber, and plastic, then scrap value is the only viable option.

In both instances, you can consider researching local recycling and salvage facilities that will assess the condition and offer a price to purchase the machine in its entirety. As an alternative, you can complete the assessment with the help of a professional appraiser and remarket the assets directly to brokers and third parties who may have a need to stock up on spare parts. Yet another option is to keep the machine on hand and strip the parts off when you need them for other working equipment in your fleet.

Whichever option you choose, it might be a good idea to obtain an overall independent condition assessment from a qualified mechanic or utilize the experience of your in-house maintenance manager to estimate this. Equipment appraisers can assist as well, based on their knowledge of typical salvage and scrap values for many different types of machinery.

From an appraiser’s perspective, developing estimates of salvage value at end-of-life is a common practice when developing annual depreciated value estimates for new equipment. This analysis is also performed by finance and leasing companies with experienced asset management teams as part of their organization.

In summary, understanding asset value at the latter stages of an asset’s life is just as important as in its early days when the machinery is in full operation. You can discuss any of these topics in more detail with an accredited machinery appraiser who is able to assist in the process.

As a business owner, when you determine it is time to sell off older equipment and upgrade to more recent or even brand-new makes and models, you will need to enter the market and begin to research options to effectively handle the transition. It’s only logical that you will seek to understand both new and used machinery pricing based on what is available from dealer networks and other sellers. Obtaining an independent appraisal of your existing fleet will be very helpful in validating and comparing your thoughts and findings, ensuring your ability to make a fully informed decision.

As part of an equipment appraiser’s analysis, they will research and source comparable market information, while also analyzing available databases and their experience valuing similar assets in the past. Used equipment asking prices and recent sales are important to review during this process, however, it is just as important to understand the new machinery market and gain this additional perspective.

Replacement Cost New is the formal term for what brand new equipment should sell for in the current market, or as of the effective date of valuation. Machinery and Equipment appraisers can utilize this component of their research in several ways when comparing it to the other market data they develop. It is a principal element of the Cost Approach to value.

An appraiser should first determine a reasonable pattern or relationship between the new and used pricing while taking into account the equipment’s age, useful life, and commonality in the resale market. For instance, how does new pricing compare to what was originally paid for the machinery being appraised? What are typical levels of market depreciation on a year-to-year basis from newly purchased to the end of the equipment’s initial life cycle?

A seasoned professional will look to estimate new replacement cost for machinery based on available market information from the manufacturer or representative vendors. Utilizing industry trends from broad indexes and applying them to historic pricing is not nearly as reliable as direct market data and should only be used as a last resort. The same goes for developing estimates of depreciation and useful life. An experienced appraiser should never assume straight-line accounting-type depreciation is applicable in the valuation industry.

Even if an appraiser has a multitude of used comparable sales information to consider, they should not neglect to understand replacement cost new, as well as the other components of the cost approach. This complimentary style of appraisal is more reliable and supportable than relying solely on a single approach.

When you decide it is time to replace your equipment and engage an appraiser to assist in the overall effort, ask about these types of methodologies and approaches to ensure you are working with the most competent professionals.

When it comes to defining the term “assets” there are so many different types that it can be difficult to understand which belong in the various categories that appraisers are familiar with and can value based on their credentials and experience. Machinery & Equipment (M&E) appraisers have, by far, the broadest array of varying property types for which they may be capable of valuing.

The clear exceptions for M&E appraisers would be intangible assets, such as a company’s overall goodwill, customer lists, trademarks, patents, domain names, and the like; and real property, most commonly viewed as buildings, land, and their associated improvements. Other areas where different kinds of expertise are required would be gems and jewelry, fine art, antiques, and other collectible types of property.

Beyond these obvious distinctions, the vast majority of all other tangible assets could potentially fall under an equipment appraiser’s purview. Here are some examples that you might not have considered:

Tangible Personal Property

This is a very broad term that is intended to primarily distinguish an individual’s ownership vs. a business. Therefore, many of the asset types are the same as what an equipment appraiser would see in a company machinery appraisal. Items such as furniture, audiovisual equipment, trucks, automobiles, hobby shop equipment, and appliances are a few of these asset types.

FF&E

This term stands for furniture, fixtures & equipment. It is often considered a “catch-all” term that groups a company’s office equipment, such as printers & computers, as well as furniture, including desks, chairs, and filing cabinets together under one common category. Fixtures refer to those items that are removable properties and thus not considered a building improvement.

On-Hand Inventory

A company’s raw materials, finished goods, spare parts, tooling, and other types of on-hand inventory have tangible value to a business. It is common for machinery & equipment appraisers to educate themselves and understand reasonable approaches and techniques to value this kind of property.

In summary, if you own these kinds of assets, and need them appraised for any reason, your best bet is to consult with an experienced M&E appraiser and determine if they have the experience to get the job done.