Equipment Appraisal Blog | Understanding Machinery Appraisals

As an experienced accredited machinery & equipment appraiser, I am occasionally asked by potential clients if I have expertise in the specific industry they operate within. My response is that, after 40 years of involvement in the machinery & equipment world, I have worked within their industry several times, however as a professional appraiser, I go where the work takes me, across any and all markets and businesses. An appraiser’s focus is on valuation, which utilizes consistent approaches and methodologies across virtually all industries while gathering the more specific market data particular to each project to support their opinions.

In contrast, an industry expert will typically act as a consultant in any number of capacities that are specific to the businesses operating in these markets. For example, an aviation industry expert may have worked as an engineer throughout their career for companies that manufacture, purchase, sell, or provide services to the fixed-wing aircraft markets. In their current role, they now provide independent consulting to clients who are investing in these markets and need guidance on current trends and technologies.

Given the broad range of services an industry expert can provide, they can afford to keep their focus within specific markets and leverage their technical knowledge and relationship networks to add value to their client’s transactions. Valuation services may be one area they provide guidance on, however, given it is not their sole focus, it is not common to see an industry consultant have the accreditations a professional appraiser requires.

That said, experienced qualified appraisers and industry-focused experts are not mutually exclusive. Certain accredited equipment appraisers have a lot of experience within focused markets, while some industry consultants may have ample experience reselling used machinery and providing clients with value opinions along the way that would be considered reliable. Appraisers will at times work with an industry expert and consider them one of several sources that support their valuation opinions.

In summary, one important distinction to make is that an accredited appraiser adds value as an unbiased independent third party who will provide their opinions with no ulterior motives or overreliance on any one source. They can provide supportable valuation reports across any market or industry. In contrast, an industry consultant may act as a primary or exclusive source that provides their opinions on transaction-related topics based on their past experiences and knowledge specific to a market. Complete independence may not be a requirement but should be understood, to avoid a situation where the opinions and advice an industry expert provides are not tied to a transaction in which that consultant may be invested in themselves.

When it comes to expert valuation assignments, a combination of objective independence and subjective opinion must occur to fully analyze the data compiled during analysis to determine a realistic conclusion. This is especially true with machinery & equipment appraisals, as multiple sources are typically utilized, the sum of which provide varying degrees of information.

There is no question that experienced appraisers with certifications and accreditations to their name must be 100% objective in providing their work with no bias or influence from any third parties. This is the fundamental foundation of the valuation industry and cannot be argued against.

That being said, an appraisal is an estimated opinion of value, and opinions are inherently subjective, regardless of the number of sources and documented information the opinion is based on. This is where the experience of the appraiser becomes critical to the reliability of the value assessment itself.

Taking this a step further, the source material an appraiser researches, reviews, and relies upon will likely have potential gaps, flaws, or opinions tied to the data, which the appraiser must make sense of and determine how best to correlate the information into a final conclusion.

In the machinery & equipment markets, data will be available in the form of listings, databases, and third-party opinions from those that manufacture, buy and sell in the industry. Depending on the commonality of the equipment, this will either be in abundance or in a more limited capacity and in either case, should be considered and weighed. Industry benchmarks and trends, such as those published in the Bureau of Labor statistics, news articles, and related sources, are other points of reference.

All of this data cannot be taken at face value for any number of reasons. Are the available listings consistent and reasonable? Are the database sources full of gaps from a lack of prior sales data? Are the opinions from third parties biased in their own right? Do industry trends focus directly on the equipment being valued?

It is eventually the appraiser’s role to sift through all this information and arrive at a common sense conclusion using their own experience and ability to put the pieces together, many of which may not be a perfect fit. This process is what separates the established valuation experts from the rest of the pack. Subjectivity will always be a component of an appraisal, regardless of the number of sources you rely upon. Being able to establish confidence and credibility with your opinions, thus making them valid and supportable, is one of the most important roles of a professional appraiser.

The importance of maintaining your company’s machinery cannot be stressed enough, as it provides immediate and future benefits to the reputation and overall success of your business. It is just as essential to track and record these practices in as much detail as possible, so you can perform reviews, understand when component replacements and refurbishments are necessary, and have them available to buyers when you look to resell these assets in the future

Capital machinery & equipment represent significant investments for businesses that manufacture goods, engage in earth moving and construction projects, manage utilities, and many other types of operations that offer products and services to their respective clients. And because equipment depreciates and has limitations to its normal useful life, it is even more critical to prioritize consistent maintenance practices that will minimize a loss in value and maximize the time before needing to replace them.

Market perception is potentially the most important factor when your business and its associated assets are involved with external transactions, whether that involves a sale, working capital infusion, new equity investment, bank financing, insurance assessment, or anything else. There will come a time when assessing the value of your used machinery & equipment will be a necessary step in a larger process, the success of which will hinge on your company’s growth or transition.

Customer perception can easily be swayed in one direction or another, based on their opinion and understanding of the integrity of your work ethic. If your machinery is not well maintained and accurate recordkeeping is not available for review, these clients may arbitrarily decide that there must be other deficiencies and flaws with your company. In the counter scenario, there will be a more favorable opinion of business practices in general if your machinery is in good operating condition with updated records available.

Without these maintenance practices and records in place, when the time comes to resell your used equipment, potential purchasers will factor in any number of unknown expenses and investments that may be needed to bring the assets back into reliable service. The impact will affect not only the immediate sale but potentially any future dealings as well.

If you haven’t already, take some additional time to review these practices with your plant manager or maintenance supervisor, so you can create the best environment where your machinery & equipment will outshine your competitors.

Machinery and Equipment is perhaps the least understood type of property when it comes to appraisal approaches when compared with Real Estate and Business Valuation. This may be because, in large part, real property, such as buildings, land, and improvements, are commonly viewed as higher value, non-depreciating assets, while overall business appraisal considers the sum of everything a company has to offer in an investment or lending scenario.

When considering the three industry-accepted appraisal methods, Cost, Sales Comparison (Market), and Income approaches, machinery valuation will almost exclusively rely on the first two, while real estate and businesses commonly use the income approach as well.

There are a couple of primary reasons why this is the case. Historic and discounted future cash flows considered and utilized under the Income Approach can often be directly tied and measured with buildings and land in the form of rental and lease revenue, while a business appraisal is in large part determined by the internal financial performance of the company.

Machinery, along with other types of personal property, are considered support assets required to be utilized as a part of a larger working operation. Therefore it is impossible and impractical to try and allocate a portion of any type of business revenue to the equipment itself. Even if machinery is the primary asset involved with the business, there are many other factors to consider in the overall company performance which directly or indirectly drive revenue. To try and allocate all or a part of these cash flows to it would be unfeasible.

Equipment value can be directly measured under the cost and market approaches by researching what new and used equipment sells for in the marketplace while applying reasonable factors for normal useful life and annual levels of depreciation. Regardless of how often the machinery operates or how integral it is to the day-to-day operation of the business, the value of these types of assets is driven by what an unrelated third party would consider paying for them, whether in its current operation or for another future use. What it costs to purchase and install these assets, new or used, in the marketplace, along with a review of maintenance history and current condition, are the driving variables behind what someone would pay for them, which ultimately translates to value.

If you are going to attempt to use the income approach to appraise equipment, make sure you have solid evidence that the cash flows are directly related to the machinery itself, and ensure that you are basing the analysis under a “highest and best use” perspective which takes into account the asset’s full potential to generate revenue. The income approach has its place in the appraisal industry, and in many cases with businesses and real estate, will be a primary factor in determining what they’re worth, however, for machinery, equipment, and other types of personal property, as a general rule, stick to the cost and market approaches to measuring these assets' true value.

Business owners get involved with a number of annual projects they need to get done in order to accomplish the goals set forth for continuing growth and success. These may require both internal employee and external advisory interaction and collaboration to complete them in a timely and orderly fashion.

When machinery & equipment appraisers are part of the mix, they should understand this broader perspective and their specific role in it, so they can provide the value-added you’re striving for to help move your company forward. When you consider engaging with a professional appraisal firm, ensure that their experience is commensurate with their ability to work within a larger team environment.

Some of the key variables that valuation experts should consider and suggest to their clients within this overall framework are:

The Effective Date of the Valuation: The written report date and effective date are often different based on the circumstances.

The Premise(s), or Definition(s) of Value: There are several distinct market levels of value to consider in every appraisal.

Desktop vs. On-site Approach: Which of these options is the right choice given the underlying requirements of the deal and the quality of the data already developed?

Additional Opinions to Include: Experienced Accredited Appraisers can also provide comments on topics such as future (residual) equipment value and remaining useful life. Is this something that might bring added value to your transaction?

In summary, ensure that the valuation firm you select will have its most senior experts directly involved with the appraisal so you can feel secure that the analysis will be well thought out and thoroughly prepared. Less experienced appraisers can have a support role in the work effort, however, avoid the firms who use their junior staff to complete all the research and legwork with the senior manager only taking a minor review role. This can lead to costly errors you won’t know about until it’s too late.

Your longer-term business goals are important and will help steer your company toward future success. The ability to count on the right team to ensure you reach those goals is essential.