Equipment Appraisal Blog | Understanding Machinery Appraisals

Complete independence is something most of us long for when it comes to living our lives. Although the definition in this context is somewhat different as compared to independence in a business transaction, the same level of importance applies to the term. Without independence in business, there exists the possibility that one or more parties involved may be making decisions or influencing those who make them in order to attain a desired result.

When value is part of the equation in a transaction, the stakes are even higher, and the risks involved are much greater. Value equals money and we all know how money can drive a lot of poor decisions.

With that idea in mind, it brings us to the concept of an independent and unbiased appraisal. Believe it or not, it was only around 35 years ago that federal and state regulators began mandating that all independent appraisers become certified, accredited, and/or licensed to become qualified. Before that time, many appraisers were not governed by these rules, which essentially means they had no official oversight. Thus, their independence, as well as the formal knowledge and understanding of how to complete an unbiased third-party valuation were not evident.

Since that time, appraisal foundations that were already in existence began to prosper, allowing for expanded oversight as well as the creation of more formal educational and experience requirements for appraisers. Formal standards of professional appraisal practice become more entrenched into the process that formally certifies and accredits valuation experts.

These changes were welcomed by banks, insurance companies, investors, and business owners, as there was now a high level of confidence that their transactions would include a fully independent assessment of value with the associated companies and their underlying assets, such as real estate, machinery & equipment, and intangibles.

The additional costs associated with these fully independent appraisals were outweighed by the added benefits, as the risk of any possible bias in their deals was significantly reduced.

In summary, there are still companies out there who claim to be appraisal experts but do not hold the required certifications or licenses needed to comply with all the regulations currently in place. Ensure that you don’t engage with any business or individual who is not accredited by a reputable appraisal association as they are not governed under these rules of independence.

There are a lot of reasons why companies and individuals need professional valuation reports as part of their ongoing dealings. Collaborative transactions, such as leasing and financing, donations and gifting, estate transfer, and mergers and acquisitions, will always be part of an appraiser’s practice. That being said, company and personal disputes will always be a primary driver of business for experienced valuation professionals.

Partnerships in companies once built to last somehow weaken and crumble when decisions can no longer be mutually agreed upon. Husbands and wives, who once enjoyed a happy relationship can no longer tolerate each other and have no interest in agreeing to negotiate a fair divorce settlement due to built-up resentment and anger.

Companies collaborating on an exciting joint venture suddenly become untrustworthy of the other’s intentions and can no longer work together as a team.

I could go on with general examples, however, the point is, that there will always be disputes arising between businesses and individuals because that’s just the way life is. People you thought you trusted show their other side and eventually betray you. Others decide they want to change their habits and opinions about important issues and begin to butt heads with the ones they previously were in sync with. It’s simply human nature. Some can adapt and resolve things between themselves, however, many cannot.

When individuals begin to disagree, a wall often builds up between the parties that is impossible to tear down. What was an issue that at first could easily be negotiated or compromised on, suddenly morphs into a problem that has no right answer. Common sense goes out the window and eventually, third parties are brought in to decide the fate of the situation.

This is where outside consultants, like appraisers and industry experts, with a high level of experience, have opportunities to work independently to assist in the dispute and play a part in the eventual settlement or ruling of the case.

If you find yourself in a situation like this, professionally or personally, first look to hire a good attorney. Then, when the time is right, discuss the case with experienced accredited consultants, such as an equipment or business appraiser, who can work with you to develop unbiased opinions about the assets involved with the case.

One of the most common misconceptions in the world of machinery and equipment (M&E) valuation is that desktop appraisals are not as reliable as those that include an on-site field visit. There is no difference in the credibility or supportability between the two, as long as the steps taken to obtain sufficient detailed asset data are completed properly.

The fact is that the vast majority of M&E appraisals are conducted as desktops. From my own experience, 75-85% of projects do not include a personal visual inspection of the equipment. I would bet those statistics are fairly consistent across the industry with my competitors.

There are a number of reasons why this occurs. Here are the most common:

• Cost to the Client: On-site appraisals require additional time and expense for the appraiser to complete, which naturally dictates higher fee quotes. In some cases, it can be twice as much or more than a desktop option. Ability to Obtain Sufficient Detailed Data from the Client: Using today’s advanced technology, along with effective communications, it is much more efficient to obtain the needed information without putting undue burden on the client.
• Low Transaction Size and/or Number of Assets Involved: It may simply not make economic sense relative to the size of a deal or if only a handful of items are involved.
• Condition Assumptions: Appraisers typically assume normal operating conditions and wear and tear when completing appraisals unless specifically told otherwise. The majority of accredited valuation professionals are not mechanics or technicians, and can only carry out a general visual verification of the equipment when in the field.
• Timing Constraints: Many appraisal projects are conducted over a short timeline where the client needs the work completed in a tight window. The majority of the appraiser’s focus should be on research, analysis, and report writing to meet deadlines.

Of course, there are times when a personal on-site visual inspection is necessary as part of the overall valuation effort. For example, the Small Business Administration (SBA) requires inspections to be completed when underwriting equipment financing transactions that are over a certain minimum threshold. In other cases, conducting the fieldwork may be the only option for obtaining the necessary asset detail required to complete the appraisal. It may also simply be the client’s preference that the appraiser come out and conduct the work personally.

To learn more about your best options when needing an M&E appraisal, reach out to an experienced, accredited professional who can take the time to discuss this topic further.

An accredited independent machinery & equipment appraisal needs to rely on several variables, utilizing components of both the sales comparison and cost approach to fully flesh out a balanced estimate of value. Researching and reviewing a reasonable amount of market sources that provide useful information is paramount to effectively working through an appraisal; however, it is common that all the pieces of data won’t consistently line up or even make logical sense in some cases.

An appraiser must understand that these market sources, while very useful, might not be entirely reliable and may even have a level of bias associated with them given the business and industry they operate in. A vital role of an accredited appraiser is to sift through the information they uncover and determine how best to put the pieces together to arrive at a conclusion of value.

This is where the level of experience an appraiser has comes into play. Determining which sources appear most consistent and reasonable, as well as making some commonsense decisions on how the particular assets being valued should trade in a secondary market throughout their useful lives will shed light on the situation.

There may be times when the equipment to appraise is very uncommon, with virtually no secondary market information available to research. In other cases, the appraiser will have dozens of sources available to them, each one marketing similar machinery for sale with a wide array of differing price points. Each situation will present challenges regarding how best to work through it and arrive at a reasonable assessment.

The purpose of the appraisal and the premise of value being estimated will also create different approaches that need to be thought through while completing the analysis. How an appraiser adjusts to each situation is based on their experience and overall understanding of the bigger transactional picture they are involved in.

The conclusion of value is ultimately the appraiser’s determination and theirs alone. The sources they rely upon are not responsible nor are they the ones being compensated to provide an independent estimate.

An opinion is always going to have some degree of subjectivity behind it, regardless of how much data supports it, and that’s okay. The more knowledge and experience an appraiser has backed up by a reasonable amount of supporting data, the better the final outcome will be.

Have you ever driven by an abandoned facility or work site and seen equipment that looks like it has been sitting there for months or even years, neglected and exposed to the elements? You can tell just from a casual view that the machinery is in dire need of major repair work or is otherwise headed to the junkyard.

This may be an extreme and broad example of how the value of equipment can be greatly affected by lack of maintenance, however, from an appraiser’s perspective, the history of an asset’s operation and care is a critical component to supporting value.

Most accredited and certified appraisers are not mechanics or technicians, and therefore cannot independently assess the cost of bringing equipment back into good operable condition. Therefore, an assumption is typically made stating that the associated values assume normal conditions exist, or they receive details from the owner or a qualified third party stating otherwise.

Even when a general visual inspection is part of the valuation effort, it is assumed that normal operating conditions exist, and effective maintenance history has been completed over the life of the assets unless the appraiser is told otherwise. If it is evident during the inspection that the assets have been out of service for an extended period and need repair work, the appraiser can apply a reasonable penalty to account for this, however, without support of the specific circumstances, the adjustment will be very broad in nature.

The fact is that in any situation, the appraised value is heavily predicated on the assumption that a potential buyer will be able to operate the equipment with minimal to no reinvestment once ownership changes hands. If the appraiser knows this is not a correct assumption, then they must determine a way to account for this that can be supported by their experience or ideally with a qualified assessment of repair costs.

Poor maintenance practices and long-term lack of use will eventually lead to a shortened life and significant repair costs for virtually all types of equipment, vehicles, and even certain personal property. If you own these types of assets and you know they will be out of service for an extended period, it is important to store them in a protected environment and keep the components running once a week or so to maintain them properly. This way, when it comes time to use them again or sell them on the open market, you can rest assured they will function reliably for you or your buyer.