Equipment Appraisal Blog | Understanding Machinery Appraisals

The acronym FF&E is a familiar term in the business world, especially with appraisers and accountants, however, what the initials technically stand for and what they actually encompass can vary depending on one’s interpretation and usage.

The initials represent Furniture, Fixtures & Equipment, which is broadly defined as: “movable furniture, fixtures and other equipment that have no permanent connection to a structure or building.”

Anytime you see the word “other” in a definition, it can open the door to any number of slightly different meanings. Most often you will see it referenced in businesses where there is a heavy concentration of office equipment (computers, printers, etc.) and furniture such as desks, cubicles, credenzas, and the like. That said, there is nothing wrong with using the term to generally reference all the tangible assets owned by a business that do not include buildings, land, and their associated improvements (Real Property).

There are some flaws with the term and its definition, however. For example, the term fixtures actually mean property that is literally fixed to a building or related structure, which is the opposite of the first word “movable” in the FF&E definition. An oxymoron that contributes to the diversity of applications in which the term FF&E is applied.

A second example is that for many companies, office furniture and equipment is not a significant tangible asset on their books, while the “other equipment” represents a much more substantial asset group, often separated from the term itself.

Some of the more common businesses where you will see FF&E used as an all-encompassing term are: restaurants/bars; retail stores; markets; fitness centers; corporate workplace offices; salons; and related companies, where the machinery & equipment component is complementary to the furniture, removable fixtures, and other items used every day.

A restaurant for example, will likely have as much invested in the property found in the serving and dining areas as it does in the kitchen and backrooms. Therefore, all components of the FF&E are treated similarly.

In addition, businesses who lease their buildings instead of owning them will want to include the fixtures (leasehold improvements) as part of the personal property on the books since they can be treated as an owned asset and depreciated. Using the restaurant example again, many business owners will spend a lot of money in the early stages of operation to improve and convert the property to fit the needs of their unique design and layout.

In summary, the term FF&E is commonly used in both the valuation and accounting realms. This acronym is subject to a wide variety of definitions given its nature, and there is nothing wrong with the varying ways by which it can be treated, as long as it is specifically defined by those using it.

Equipment appraisers are sometimes asked which is the better source for researching used machinery market activity: current listings or public databases which reflect recent historic sales.

The answer is that both sources are very useful, and should be considered wherever possible, to create a balanced perspective when valuing machinery & equipment. Each has its pros and cons which need to be understood in order to reach the most reasonable conclusion when weighing the data. Experienced M&E appraisers know that taking any particular source of information at 100% face value, without the broader context of related data and approaches can lead to poor results.

Here are a few additional insights to consider when reviewing both used equipment listings and sales databases:

Equipment Listings for Sale

When appraisers are able to locate a significant amount of available listings for the assets they are researching, it may seem only logical that this would be the best source of information, given it is coming directly from an active secondary market. That may be true up to a point, however, you need to qualify these listings and consider only those that come from valid resellers, and are not priced out of any reasonable range of value. Even when you narrow these down in this way, you should also consider discounting the listing price to reflect what would typically be realized with a final sale. It is common practice for used equipment dealers to price their machines over fair market value, to allow room for negotiating.

Other things to consider would be location; how long the machine has been for sale; how many similar items are available; if it is refurbished and being sold with a new short-term warranty.

Machinery Sales Databases

Historic sales databases can be found either through annual subscription providers or in the public domain and can include both dealer and auction-level activity. The key thing to keep in mind with this information is that it can be based on very small samples or, on the flip side, consider too broad of a market, which in both cases can skew the results.

Some of these databases can be a good source to confirm the new cost, year, make, and model of the assets being appraised, as well as capacity specifications. Certain databases also attempt to create estimated values for the machinery over time, which is useful when forecasting future values with used equipment. That said, it is prudent to consider if the data makes sense in the context of the other sources you are researching and relying on.

In summary, both of these types of market data should be researched and considered when available to an appraiser. They should always use their judgment based on the reliability of the information, in the broader context of their experience and overall approach, to reach a reasonable conclusion of value when completing a machinery & equipment appraisal.

Machinery & Equipment valuations rely in large part on available market data that can be researched and considered. This information can be in the form of recent sales, current listings, new equipment pricing, opinions on normal useful life, and average annual levels of market depreciation.

Two of the most common sources of this data are equipment dealers (vendors) involved in the retail sale of new and used machinery, and auction companies, who liquidate thousands of used machines each and every year through advertised public sales. How does an experienced appraiser review these sources, and consider them when valuing similar assets?

The answer to that question will likely vary somewhat depending on the appraiser you are working with, however, it is important to first understand the differences between equipment dealers and auctioneers, along with the levels of value each of these sources equate to.

New and Used Equipment Dealers

These market sources are usually experienced in specific equipment types and manufacturer/model lines and can provide valuable insights on the overall market, new and used equipment pricing, normal useful life, and how the assets typically decline in value over time. This data and their general opinions are viewed as direct Fair Market Value comparisons, however, they can also discuss how they purchase used equipment such as typical buy/sell margins from an Orderly Liquidation perspective.

It is important to keep in mind that, although equipment dealers are considered experts in their specific market areas, there may be some level of bias associated with their opinions. It is always a good idea to consider additional perspectives in order to gain a balanced conclusion of value.

Equipment Auctioneers

Auction companies are well recognized in many types of equipment markets, most notably in construction, earth moving, transportation, material handling, machine tools, and certain industrial manufacturing industries. Auctioneers provide a convenient, time-sensitive opportunity to liquidate assets under an organized public sale, and may even provide guaranteed buy-out options as an alternative for those unwilling to take on the risks associated with a “no-reserve” sale.

Because these sales are in the public arena, much of the data can be discovered quite easily through company websites, online databases, and other open sources. Auction sales data technically falls under the comparison to Forced Liquidation Value from an appraiser’s perspective, and actual realized sales can vary greatly depending on the type of equipment, buyer turnout, seasonality, and any number of other factors. Because of the potential inconsistency associated with this data, it is important to understand how best to consider it in conjunction with other sources of data to then conclude on a reasonable value.

In summary, new and used equipment dealers, along with auction companies, are considered two of the most important market sources of data for machinery & equipment appraisers. Making sense of this information and ultimately forming an opinion of value for the actual assets being appraised is the most critical step in any valuation effort. Engaging with an experienced, independent, accredited appraiser will provide you with confidence that the result will be credible and reliable.

There are times when used equipment dealers and resellers are asked to provide estimated values for the types of machinery they sell. Alternately, independent equipment appraisers have clients who wish to market their assets for sale, while asking the appraiser if they have experience liquidating the M&E they value. There are both similarities and differences between independent machinery & equipment appraisers and used equipment resellers, which creates a fine line between the two that should never be crossed.

When researching market values, equipment appraisers will contact used machinery dealers in the relevant industry, such as earthmoving, truck transportation, or parts manufacturing, to name a few. These vendors can provide insightful data to the appraiser, specific to the makes and model types they sell, which becomes one of several sources relied upon during the valuation analysis.

Equipment dealers often provide their clients with estimates of value prior to engaging in a resale effort, to assure them of their experience and to manage expectations for the eventual prices realized at sale. Both appraisers and resellers are continually crossing paths in the used equipment marketplace, even though their primary focus is quite different.

Here are some other distinctions to consider:

An accredited appraisal is an independent, unbiased opinion of value based on a blend of approaches and methodologies which, in part, consider the opinions of certain used equipment dealers. An experienced equipment appraiser will consider multiple sources before ultimately concluding on a value opinion.

This opinion is not a guarantee of a sale price outcome and the information they receive from equipment dealers will be subjectively weighed, depending on the rest of the information they gather. Equipment appraisers typically have a broad degree of experience in many distinct markets and industries, directly tied to their client’s businesses.

A used equipment dealer, on the other hand, will usually focus on a particular market, and more specifically, certain makes and models of machinery with which they have built their support and credibility over the years. These dealers will have a significant amount of expertise in these more refined areas but their primary goal is in the sale of equipment. While they understand value as a result of this experience, they are not considered independent or accredited appraisers. There may even be some level of bias in their opinions, given their ma objective is to sell, not appraise.

In summary, appraisers and used equipment resellers are quite different in their overall skill sets, however, the markets they work in often overlap. It’s prudent to understand the distinctions of each, so you can create the most beneficial team around you when it is time to consider buying, selling, or financing your machinery & equipment.

Many businesses rely on the use of heavy equipment to produce the products and services they sell, such as earthmoving, truck transportation, building construction, and all types of utilities, energy, and manufacturing companies.

In certain instances, the value of the machinery is the most significant component of the balance sheet, and can even be greater than the annual revenue of the business. If you own or are considering investing in a company with this type of profile, understanding the current market value of these underlying assets is as important as reviewing historic and forecasted financial statements.

To effectively measure the overall value of a business, one should consider breaking it down by the prominent asset types, both tangible and intangible, which translates to the need for an independent appraisal for each of these areas.

It would be careless to rely on the company's internal accounting records and policies to measure the value of their machinery & equipment, as they generally utilize accelerated depreciation rates to amortize the capitalized cost as quickly as possible.

If the company has a high content of expensive, long-lived machinery & equipment with an average age of over 5 years, there is every chance that the market value of these assets is much higher than the net book value recorded by their accountants. This variance can be monumental, even for small businesses with lesser sales volume.

For example, a company with $20,000,000 of capitalized machinery and equipment could effectively depreciate the entire cost over 5 years, realizing a net book value of $0 after 60 months. If these assets are used in manufacturing or construction, the likelihood is they will have a normal useful life range between 10-20 years, as long as they are well maintained.

Based on this generic scenario, it’s not unreasonable to estimate the market value of these assets to be $10,000,000 or higher, if the equipment is still relatively young, and in good operating condition. The appraised value of the company’s equipment would then be utilized as a part of the overall business valuation, instead of $0. One might say that is a difference worth determining!

Whether your targeted company is heavily reliant on tangible machinery equipment or not, it is always a prudent decision to obtain an updated Fair Market Value appraisal for these assets to effectively measure their true worth