Equipment Appraisal Blog | Understanding Machinery Appraisals

One of the most common documents an equipment appraiser will receive from their clients during the early stage of the valuation process is an asset depreciation report, which tracks all the capitalized machinery, FF&E, real property, and improvements that a company has invested in and acquired over time. This document can be useful in the valuation process; however, it is generally not reliable on its own.

The capitalized depreciation record will usually be categorized and itemized by type of asset and includes the date of acquisition, dollar amount, and a brief description of the item. There will also be columns for accounting information so the company can internally track depreciation while providing a helpful tool for property tax and balance sheet purposes.

From an appraisal perspective, the original acquisition dates and associated investment amounts are the most beneficial pieces of information, however, with the descriptions typically abbreviated, it will be difficult to rely on the document to create an accurate itemized listing for the purposes of researching values. These documents can also be incomplete or include equipment that has long been disposed of. This is because companies will expense a portion of their equipment purchases while not having a consistent process in place for updating the report for accuracy.

It is important the appraiser and client review this listing together with the goal of expanding the descriptions while adding items that are not on the list and excluding those that should be removed.

For example, old computer equipment might have been sold or scrapped years ago for newer models but remain on the list, or there may be $10,000 worth of hand tools that were expensed over the years and never capitalized and depreciated.

The goal in any M&E appraisal is to create a refined list that is reasonably accurate and complete so the valuation process will be supportable. The primary focus can be on the larger, more valuable equipment while potentially grouping smaller asset types like office equipment and support tools so the process doesn’t get too bogged down and time-consuming.

In summary, when you provide an asset depreciation schedule as part of the data requested by the appraiser, anticipate the need to get more involved to afford them a better understanding of the detail behind it so they can develop a more accurate listing that represents your company’s machinery and equipment.

Simply put, the better the data provided, the better the result will be with the valuation. Discuss this topic with your appraiser proactively to ensure a timely and effective process.

Machinery & Equipment (M&E) valuation relies in large part on understanding the new and used trade markets and developing an analysis that reasonably reflects what the particular assets being appraised would be worth in those markets. Another important component of an M&E appraisal is looking internally at the business that is or was directly involved with the most recent purchase and operation history of the equipment to understand the facts behind this.

The additional perspective an appraiser receives by learning this history is critical to making potential adjustments to the market information they research. This history provides in-depth specifics for the machinery actually being valued that can’t be disputed. Every piece of equipment is unique in its own way. There may be somewhat different specifications between the assets being valued and what is available as a comparison in the market. Materially different hours or mileage may become a factor to consider as well as any recent upgrades or refurbishments completed.

Knowing the original purchase price of the machinery, even if it was acquired 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 in their ability to provide all the right answers. This is perhaps the biggest challenge in the equipment industry. Unlike business valuation, where databases and historical financial data are almost always available, or real estate, which has a tendency to provide a wide array of published comparable property resale data, the machinery markets can behave in very inconsistent ways.

You will commonly see the same makes and models of equipment, with virtually identical specifications and usage, listing and selling for vastly different prices. The auction marketplace, which reflects billions of dollars of used equipment sales annually, experiences varying levels of demand, any of which may play a part in developing values for many types of assets. With the recent growth in online auctions across these markets, these disparities can be even more pronounced.

In summary, the historical data you can provide to an appraiser that complements their independent research and analysis will be very helpful in ultimately determining a reasonable and supportable value for your M&E.

The next set of blog posts over the coming weeks will discuss the various elements of machinery and equipment appraisals and their potential influence on the overall valuation analysis. This week’s focus is on normal useful life.

Normal useful life is essentially the estimation of how long equipment will last from the time it is new until it needs replacement or a significant rebuild/refurbishment to extend its service. This is typically measured as a specific number, or within a range of years, such as 10 or 8-12 years.

Determining useful life can assist the appraiser when valuing equipment that is still in its initial usage life cycle and provides a broad perspective of the remaining (residual) value, as a percentage of its original or replacement cost. Appraisers can effectively develop depreciation value curves with useful life as a timeline framework while researching and implementing used market data to create points along the curve for estimating fair market and liquidation values, as well as end-of-life salvage value.

Normal useful life should be viewed as a broad-based component of the overall appraisal effort, which provides a reasonable sanity check to the market data and other cost approach variables that go into the analysis. For example, if you have estimated normal useful life at 10 years, and your other research shows that 5-year-old equipment is being marketed for 40-50% of new cost, which could reveal a consistent pattern from both of these perspectives. If, however, the market data for 5-year-old equipment is 60-70% of new pricing, then your useful life assessment may be too low.

Keep in mind normal useful life is merely a benchmark and represents a single life cycle. Appraisers will often see much older equipment available in the used marketplace that has been refurbished or rebuilt during its life which essentially extends or resets the life cycle for these aged assets. The concepts of “effective age” and remaining useful life, come into play when valuing these older machines. For example, a machine originally manufactured 20 years ago with a 10-year initial normal life may “effectively” be much younger and have a number of years of life remaining, given the refurbishment effort.

It's important to estimate normal useful life and remaining life for both newer and older vintage machinery and equipment as part of an appraiser’s overall analysis. Factoring in the market data and other cost approach factors you develop will create a well-researched and supportable valuation.

Going through a divorce is one of the most difficult experiences in people’s lives, and many can drag out interminably due to the inability to obtain a fair settlement given a lack of mutual cooperation. When one of the parties owns a business, the value of the company and its associated equipment should be independently assessed, however, the ability of professional appraisers to complete this task can be challenging.

It is common practice that an appraiser will engage with the ex-spouse who may have little to no involvement or understanding of the other partner's business, and they are simply looking to determine a fair value as part of the division of assets. The primary issue an appraiser must tackle is access to information. As with any work effort, the data behind the analysis should be inclusive, detailed, and accurate to properly assess a supportable conclusion. Unfortunately, the party who is the business owner can often create stumbling blocks to obtaining this information and may look to control the situation under their terms, while being selective with what they provide.

You might think the court system and the judge or arbiter involved would demand a certain level of cooperation and use their authority to manage this situation, however, there may be other factors in the divorce or with state laws that might limit their influence. Even in situations where court orders are issued compelling the disclosure and access of information relative to the assets and financial data of a business, there is no guarantee the owner will comply.

The appraiser might attempt to facilitate the situation where they can provide insight into their experience with similar situations while offering flexibility and options that might help the process move forward. They will likely need to work with incomplete information and make reasonable assumptions to fill in the blanks that may otherwise be provided in a more cooperative scenario. Ultimately, any third-party consultants engaged in a divorce proceeding will have a limited level of control in the process, and they will need to rely on their client’s and their attorney’s ability to influence the outcome.

If you are going through a divorce and need valuation services that you believe might be under a strained situation, ensure that you engage with an experienced professional appraiser who is familiar with these types of scenarios. You will need all the help you can get to accomplish your goal of a fair settlement while knowing a lack of cooperation will be a prominent factor during the process.

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Many small to mid-size businesses that utilize a lot of machinery will likely have several older pieces of equipment that still operate efficiently and effectively. As long as maintenance practices have been steady over the years, older equipment will continue to be an important component of your company’s operation, and you can avoid the need to spend a lot of money replacing them.

When you look at how these older assets depreciate and resell in the used markets, you soon realize that once they hit a certain age level, their value will begin to level off, assuming they’ve been taken care of over their lifetime.

As a general rule, many types of machinery and equipment will depreciate more during the first half of their useful life and slow down considerably over the second half. That is due to factors such as lapses in warranties, no recapture for initial up-front sales costs such as taxes, freight, rigging, and overall secondary market behavior, which, over the years, has created this pattern based on the buying and selling habits of equipment owners.

The closer machinery gets to the end of its life, the slower this annual loss in value will be. Depending on the type of equipment, once it falls within a certain age range, say 10-15 years old, you will see no material difference in what those same models sell for in the secondary market. Even 20+-year-old pieces of machinery, considered well past their normal life will resell at similar levels as long as they remain in operable condition and have had components parts replaced when necessary.

This concept is also bolstered by the highly active secondary markets for used equipment with both private and public sales activity reaching billions of dollars every year. As an example, if you track this activity, you will commonly see a 15–20-year-old wheel loader sell in the same price range as a 10-12-year-old machine. Of course, there are other variables at play, such as the commonality and availability of certain model types, condition, and competition, however, the fact remains that older assets will have a much smaller value differential than newer machines.

The practices of owners and operators, as well as the buyers and sellers of used and new machinery, have helped create this pattern, and it has remained consistent over the decades. There is no denying that equipment loses much of its original new value over time. Once you better understand how it depreciates year to year, the more knowledge you will have when you are in the market to buy and sell these types of assets.