Equipment Appraisal Blog | Understanding Machinery Appraisals

Equipment Leasing: Its Growing Popularity and What You Should Know

Posted by Equipment Appraisal Services on Mon, Nov 14, 2022 @ 07:30 AM

 

 

Machinery Equipment Appraisals Leasing

Equipment leasing has been around for decades however many business owners still do not fully understand the pros and cons of these types of transactions. With many industries growing aggressively since coming out of COVID shutdowns and slowdowns, equipment leasing is a popular way to reduce excess working capital needed to acquire these assets.

So, what else should you be aware of before you sign a new lease agreement? Here are a few thoughts to consider:

I read an article from a major business publication posted earlier this year that claimed a company owns the equipment after the lease expires. This statement is very misleading and essentially untrue on many levels.

First, it depends on the type of lease you enter into. Most lease agreements include a purchase option of some type which must be exercised by the business in order to gain title or ownership. Certain lease contracts have a nominal purchase option, (as low as $1) at expiration however, these have to be treated as loans on your company’s books since there is a requirement that purchase options fairly represent the future value of the equipment to gain the off-balance sheet accounting benefits you would prefer to have.

More typically, purchase options are stated as a fixed percentage of the original purchase price, commonly in the 10-20% range, depending on the lease term, or based on the fair market value of the assets. If the options are not exercised at lease expiration in a timely fashion, the owner (Lessor) can compel you to return the equipment or continue to lease it for an extended period.

Make sure you carefully read the purchase option language before signing and determine if it makes sense based on your present and future plans. Track the lease internally and consider what you need to exercise at least 6 months in advance of expiration. Notify the Lessor as required to keep the original terms in place. It is easy to fall into a situation where you forget to respond as time goes by, and are put in a low-leverage situation with limited, undesirable options left.

An equipment lease is a great way to keep assets off your balance sheet as well as the associated debt which can make your company look highly leveraged. Instead, your business can treat the lease payments as an annual expense that can be written off. Depending on the type of lease you enter into, your accounting factors may vary, so ensure you consult with your tax accountant before finalizing lease terms.

Tags: machinery & equipment appraisal, equipment leasing, lease buy out

Leasehold Improvements vs. Building Improvements. Are they different?

Posted by Equipment Appraisal Services on Mon, Aug 22, 2022 @ 07:30 AM

Machinery Equipment Appraisal Appraiser Leasehold or Building Improvements

Over time, business owners will need to consider investing in improvements to their facility and associated property if they have significant brick-and-mortar buildings where employees work and production is ongoing. Just like the purchase of real estate and equipment, these enhancements can be capitalized as a tangible assets and depreciated. In turn, they add value to the company’s infrastructure and can be appraised.

These investments are referred to as either leasehold or building improvements. The primary distinction between the terms is based on who the owner of the property is. If your business leases the building as a tenant with a landlord involved, then you would treat these as a leasehold improvement on your books. For internal depreciation purposes, they should be amortized over 15 years.

If your company owns the buildings and land, then the improvements are capitalized as part of the real property and treated as building assets, which are depreciated over a longer term, consistent with real property accounting rules.

From a valuation perspective, leasehold improvements can be appraised on an “in-place” or “installed” basis, since they only hold value to a building tenant while the business remains in operation. If your business relocates in the future, you cannot physically carry these assets with you to the new location.

As a result of this, in the long run, building owners reap the rewards of the improvements should their tenants vacate the premises, which can benefit their lease pricing and carry it over to a new company moving in even just a few years after the improvements were completed. Try to work with the landlord while you can, to gain some type of lease break or other benefit if you pay for these improvements.

You often see this scenario with heavy turnover businesses such as restaurants and related food services companies, as well as start-ups in tech and scientific industries. It’s a good idea to have an improvement investment concept in place, that you can show the building owner while you’re negotiating the lease terms. It’s also beneficial to work with your accountant and engage with an independent valuation firm to determine your best options as you move forward with your growth plans.

Tags: machinery & equipment appraisal, accredited appraisers, leasehold improvements, building improvements

Should You Get an Appraisal? A Variable Business Cost That's Worth it

Posted by Equipment Appraisal Services on Mon, Jul 25, 2022 @ 07:30 AM

Machinery Equipment Appraisals Appraisers Variable Costs Value

Many businesses have been feeling the sting of unprecedented economic change since 2020 for reasons I don’t need to elaborate on. By now, we all understand the toll these past couple of years has taken on a broad range of companies, across a multitude of markets and industries. Those fortunate enough to not be overly affected by these challenges have done so by the skin of their teeth, and, therefore, the vast majority are counting their pennies a bit more closely when it comes to variable expenditures.

An unplanned variable expense you might be considering could be an appraisal, either for newly acquired or existing machinery & equipment, industrial & commercial real property, or an overall business valuation. When budgeting for expenses that are not already engrained in your company, the question may arise as to whether the benefit outweighs the cost. Is this type of expense absolutely necessary, or can your business live without it for another year or so

Some unforeseen costs are necessary but have no beneficial measurement, such as increases in overhead, like rent, insurance, and maintenance/repair costs. Others, such as asset valuation, can be weighed against the potential to save money when acquiring used equipment, or maximizing potential value in a sale or financing transaction.

When weighing these costs, it is important to consider paying a bit more for a better quality product, which will provide the best “bang for your buck,” with the benefit further supported by an experienced service provider, who won’t sacrifice quality to provide the cheapest available option.

It is always a difficult decision when entering into a relationship with any new vendor or contractor, to choose a business that not only fits with your company’s profile but can remain a long-term option, should you need to complete the process again down the road. An accredited, certified appraisal professional is one of those types of providers who will fit both your short and long-term needs, and make the expenditure easier to justify, given the overall benefit you will reap as a result.

Supporting variable costs will always be a difficult challenge facing businesses every year. Making sound decisions will come down to choosing the right partners who understand your requirements and will provide the best overall product that maximizes future benefits.

Tags: machinery & equipment appraisal, business appraisal, variable costs, value

Equipment Appraisals are More Like Puzzles than Math Problems

Posted by Equipment Appraisal Services on Mon, Apr 04, 2022 @ 07:00 AM

Machinery and Equipment Appraisal Appraiser Accredited Experienced

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.

Tags: machinery & equipment appraisal, accredited appraisers, equipment valuation, experienced

Appraising Machinery & Equipment in Emerging and Expanding Markets

Posted by Equipment Appraisal Services on Mon, Mar 07, 2022 @ 07:00 AM

Machinery and Equipment Appraisals Expanding Changing Markets

When appraisers are tasked with valuing equipment in industries which are continuously evolving due to events such as technology improvement, law and regulation revisions, or new government initiatives, how do they adapt to the likelihood there will be limited market data and comparable resale information available to consider.

Some of these ever-growing markets include biotech, cannabis, solar energy, and electric-powered vehicles. There are businesses popping up all the time in support of these industries that need capital to withstand the early stages of growth and become successful. The assets of these companies will be limited to the property and equipment being acquired to operate, with many types of machinery having little to no resale history to research and estimate value for.

The fact is that appraisers come across these types of challenges quite often, even with long-established businesses that operate customized equipment with similar limitations in the secondary marketplace. So how do they adjust their approach knowing that comparable sales data will be virtually non-existent for these types of machinery?

Fortunately, an experienced, accredited appraiser understands there are two primary methodologies that are established and supportable, especially when used in tandem, to complete a reliable and defendable equipment valuation. Once it is determined that comparable equipment resale data will not be a factor to consider, the appraiser will look to contact the manufacturers and vendors involved with the specific build, as well as similar types of equipment in the market.

The focus of the discussions should revolve around opinions of replacement cost new, useful life, and reasonable levels of market depreciation expected over this period. They can also gather general research on the equipment and overall marketplace available from relevant third-party websites with experience in the industry, to better understand the ability to resell the equipment in the future.

Another important component will be obtaining and reviewing the actual investment for the equipment, including the purchase price and costs associated with the installation. This can be found in documents such as purchase orders, quotes, invoices, and capital asset accounting records.

Once the research is completed in these areas, the appraiser can reasonably estimate value for these more unique and specialized assets, that have little to no resale history associated with them. The ability to still consider market sources under this type of approach will balance the investment cost information provided by the business, resulting in a reliable appraisal.

These emerging and expanding markets will eventually have a history that an appraiser can rely on going forward, however, the ability to adapt and utilize the resources available in these early stages, is critical to meet the current challenges appraisers face today.

Tags: valuation, machinery & equipment appraisal, ASA accredited appraiser, emerging markets, expanding markets