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.

An accredited, reliable, and defensible equipment appraisal should include at least three components: a USPAP (Uniform Standards of Professional Appraisal Practice) and ASA (American Society of Appraisers) compliant narrative summary report discussing the valuation methodologies and conclusions; an appendix that itemizes the assets that include associated details; and photographs of the equipment.

The narrative report is structured fairly consistently throughout every valuation, with the appraiser focusing on the processes, methodologies, scope of work, assignment summary, definitions used, research, market and industry sources utilized, and the value conclusions.

The photographs are self-explanatory, and ideally include a couple of images of each item along with the machine ID tags, which verify the specifications of the equipment. There are exceptions when photographs cannot be obtained in certain cases, and the appraiser can usually make allowances for this without compromising the integrity of the valuation.

The most important component, in my opinion, is the itemized asset detail, typically listed as an appendix to the report. This document is the backbone of the appraisal and includes the data necessary to document the transaction for which the appraisal is to be used. Regardless of the number of assets involved, this detail is useful for the business owner’s internal accounting and tax records, as well as providing documentation for third parties, such as investors, banks, financial institutions, and tax authorities, when they secure or review their collateral interests.

This detailed appendix should include the following information for each line item asset being appraised:

Description/Equipment Type: (Ex: Hydraulic Excavator or Vertical Machining Center)

Make/Manufacturer (Ex: Caterpillar, Mitsubishi)

Model #

Serial #

Year Manufactured or Effective Age, if Unknown or Refurbished (Common for Older Assets to Extend Their Useful Life)

Additional Specifications and Comments Section (Ex: Condition if other than normal or good; Capacity, Hours/Mileage, Attachments)

Estimated Individual Values and Summary Totals

The report narrative summary will generally only reference the total value for all the assets appraised and refer to this appendix for the itemized detail.

It is not uncommon for clients to request this detail in a separate workable file, so they can better utilize the data as well as transfer it to their internal documents. This is generally acceptable to the appraiser, with the firm understanding that the data itself will not be altered. As long as the appraiser retains the original files, any potential disputes on this issue can be easily remedied.

In summary, when you are considering engaging an equipment appraiser, ensure that these component documents will be part of the overall valuation report and that you are working with an experienced accredited, ASA machinery appraiser.

Every equipment appraisal can be classified as either a desktop or an on-site. A desktop is one in which the equipment is not physically viewed by the appraiser, who instead relies on the client to provide the necessary data required to properly describe, identify and value the property. The on-site option includes the appraiser personally inspecting the assets during the initial phase of the project to obtain all this information directly.

There are pros and cons to each option, and given the circumstances of each project, one may clearly be more preferred, while in other cases, it will come down to a decision based on cost, efficiency, and/or logistics. If the appraiser you’re working with is highly experienced, they can often suggest the better option based on their understanding of the overall scope of work and the asset mix. Either way, both options are reliable, defensible, and supportable, as long as the appraiser obtains the necessary data to get the job done.

Here are a few of the important factors that go into the determination of engaging in a desktop vs. an on-site equipment appraisal:

Quality of the Data Available: Depending on the level of detail provided by the client, and their ability to obtain the necessary specifications and photographs for the equipment, an on-site valuation may be the most effective option.

Number of Assets and Overall Value: Generally speaking, the larger the transaction and the greater the number of assets, the more likely an on-site appraisal would be preferred. There are typically adjustments, such as new assets purchased and older machinery being retired, that don’t show up on the available listings and can be verified on-site. In addition, the higher appraisal fees associated with personal inspections can be better justified in relation to the overall project.

Cost: The travel and expenses of the appraiser getting to the site(s) and spending the necessary time to inspect, take photographs, meet and interview key company personnel needs to be weighed against the benefits. Locality: The ease, or lack thereof, of traveling to the facility. If the business is close to a major city or way out in a very rural environment, may factor into the decision. Spending an inordinate amount of time getting to and from the sites can oftentimes create a cost inefficiency.

Timing: If there is a very tight timeline to complete the valuation, the desktop option may be the only reasonable approach to meet the delivery deadline. Scheduling and executing the on-site work can take anywhere from a few days to a couple of weeks.

Transactional Hurdles: Depending on the client and scope of work, it may be a requirement to include an on-site personal inspection by the appraiser as part of the process. This may come into play with financial institutions, the SBA, litigation cases, business disputes, and tax authorities.

As an appraiser, completing the site work independently results in a better understanding of the specific business application of the assets and allows for greater control over the data gathering process, while providing a hands-on personal experience. However, as long as the information available to the appraiser is of reasonable quality, the desktop option will be more than adequate. In all cases, the machinery & equipment appraiser should be able to guide you through the scope of work process which will ultimately determine the best options for you.

When you speak with potential appraisers about engaging in a valuation effort, whether it’s for machinery & equipment, personal or real property, business, or anything else, you should be asking if their work complies with USPAP standards. Before you ask the question, though, here is an overview of what USPAP means so you can better understand the importance of this appraisal requirement.

What is USPAP

USPAP is short for Universal Standards of Professional Appraisal Practice and is considered a type of quality control to a formal valuation process. It was established prior to the Savings and Loan Crisis in the late 1980s and then taken over by a committee called The Appraisal Foundation (TAF) to ensure that artificial inflation of an appraisal did not grow out of control again as it did during that period.

The standards that comprise USPAP are updated every year which allows it to stay current with changes in the industry and any new regulations. Though it's mainly used in the US, it has been adopted in whole or part by a large number of professional appraisal organizations in other countries. Its focus is not on controlling the actual methods an appraiser utilizes but on specific standards for the appraiser’s qualifications, ethics, scope-of-work rules, report writing requirements, record-keeping, client disclosures, signed certifications, and related topics.

There are specific standards that pertain to all types of appraisals and can vary by valuation discipline, including machinery & equipment, business, real property, and personal property. As an accredited appraiser, whether you are a Senior ASA with the American Society of Appraisers (ASA) or affiliated with another valuation group, you are required to meet the qualifications for USPAP. This begins with a 15-hour course for first-time professionals, with continued compliance every two years to ensure the appraiser stays abreast of new developments. The follow-up courses are 7 hours long, however, if you miss one of these 2 year periods, you are required to go back and take the 15-hour course again.

The appraiser is issued a certificate after each course, which can be provided to you upon request. Once you have confirmed the valuation professional is USPAP compliant, you will have confidence that he or she is well-educated and experienced in the appraisal profession, and can deliver a well-researched, supportable report.

Becoming an accredited appraiser requires continuing education not only in USPAP but as an ASA professional as well. By understanding the USPAP Appraisal Standards and how they impact your valuation in terms of the individuals involved in the work effort, you gain valuable insight into the importance of engaging with the right people to complete this for you.

Look Far and Wide and be Patient Before you Liquidate your Machinery & Equipment

Given the sharp downturn in the oil and gas field production industry during the last couple of years, with energy companies dealing with low market prices and oversupply, it is difficult to imagine the market ever returning to the boom days it enjoyed in the past. With many drilling and service companies currently sitting on their equipment, waiting for some positive news, it may seem like there is no light at the end of the tunnel.

Hydraulic fracturing or "fracking" as it is commonly referred to, is a process of drilling and then injecting water, sand, and chemicals into the earth, where the rock, or shale, below is fractured and, as a result, releases oil and gas. This industry has been heavily regulated, and, although it produces natural gas which is considered "cleaner" than coal, it has been harshly criticized for various health and safety reasons, among others.

The early results of fracking led to an oversupply of energy sources in the US, Canada, and various overseas countries, however, the resulting issues included a sharp drop in oil prices along with many energy services companies taking huge losses given all the costs and penalties of doing business.

If you own or work for a company that services the oil and gas fields where fracking was commonplace in the past but has since dried up, it may be time to complete an updated equipment appraisal on your equipment and begin to look outside your local resale markets to potentially sell some of your excess inventory of assets. There are still pockets in North America as well as overseas where the oil and gas markets remain active, and you may be able to find an opportunity to receive a fair price for your equipment.

As an alternative to liquidating through an auction service or sitting idly by while the uncertainty grows in this industry, you may want to consider engaging in a longer-term hybrid plan of selling what you can at fair prices and paring down your business to a more reasonable level, in anticipation of some kind of upward market turn in the months to come.

These market fluctuations can be severe in the oil and gas industry, and maybe no more so than it is experiencing at present, however, historically, there have always been changing economic developments over the years which turn things around when you least expect it.

Along the way, consider obtaining an updated equipment valuation from an independent accredited machinery & equipment appraiser who can provide realistic values on your assets without the additional agenda of trying to assist in your resale effort.