Equipment Appraisal Blog | Understanding Machinery Appraisals

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.

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.