Equipment Appraisal Blog | Understanding Machinery Appraisals

If you are a business owner who has a lot of equipment operating every day from a production perspective, why not consider maxing out its working potential by tapping into its other benefits? Ownership has many perks, including the ability to turn hard-earned equity into cash. Gaining access to working capital will allow you to invest in other areas of your business, such as expanding personnel or buying more machinery to handle growth needs.

Although industrial machinery and heavy equipment (M&E) will depreciate over time, as opposed to land and buildings, they continue to hold significant value through the years, as long as they are well maintained. If you paid cash for them, or your initial loans have been satisfied, even if they are fully depreciated on your books, the actual market value of these assets can be determined and used as the basis for new debt that results in a significant cash infusion for your business.

When you begin working with a bank or other financial institution, take the time to develop a detailed listing of all your M&E, while providing access to your original purchase documentation, if required. The most important data to list out would be the general description year, make, model, and serial number (or VIN) for each item. Specifications such as production capacity, size, length, tonnage, or any important capabilities will be useful.

You and your preferred lending facility can work together to begin the process of developing estimate values for all the M&E while understanding the requirements of getting approved for your working capital loan. Keep in mind the bank is investing in you and your company, while taking a lien against the equipment as collateral, therefore, it will be important for them to become comfortable with the transaction. Most lenders will approve a certain percentage of Fair Market Value or look at more conservative liquidation values as the driver of the loan amount.

An important next step will be to engage with an experienced, accredited machinery and equipment appraiser, who can independently support the value of your assets. They will research the industry and develop opinions of value at various resale levels in the market while utilizing sources who are involved with the sale of new and used machinery. The lender may allow you to arrange for the appraisal directly or prefer to handle it themselves. In either situation, you will need to participate throughout the process, to ensure the appraiser has the optimal amount of information to best understand the history and current status of your M&E.

This type of unbiased report will independently verify a reasonable value for all your M&E, so you can get approved for that working capital loan your company needs to continue to grow and be successful today and for years to come.

Even though other professional appraisers may disagree with me on this topic, I find it is relevant to raise the issue of whether the income approach should apply or even be a consideration when valuing most machinery and equipment (M&E). In my 40 years of working in the M&E asset management and valuation markets, involving machinery across virtually every known industry, I can count on one hand how many times I have even attempted to assess and place weight on this approach. The same goes for the number of times I have been asked by a client even to consider it.

In layman's terms, the Income Approach estimates the current value of the future economic benefits of owning a particular piece of equipment. Similar to using this approach to estimate the value of a complete business or real property (land, buildings, and related assets), which is relevant in many cases, it requires the ability to clearly separate and directly apply revenue and expenses to M&E.

A scenario where this might be possible is a business that owns a rental fleet of equipment such as trucks, trailers, or heavy machinery. Both short- and long-term rental history could be considered and potentially applied to estimate the value of this type of activity. There are concerns, however, as to the validity and reliance of the assessment.

First, it is common practice in the equipment rental industry to apply discounts to the eventual purchase price of these assets based on past rentals when their clients eventually want to buy them outright. Even with large assets such as aircraft, this is not unusual. The result is that a significant portion of rental income lessens the real market value of the equipment, causing it to get tangled up with the other approaches to value.

Second, assuming you can estimate value under the Income Approach, given the restrictions and requirements, how do you weigh the result in the context of the other approaches, namely Cost and Sales Comparison (Market)?

You cannot completely ignore the other two approaches, as they should be considered and applied to some degree in every equipment appraisal regardless of the purpose, especially if the income approach estimate is materially different from that of the cost and market methodologies. I have never completed an M&E valuation without placing weight on each of these two methods.

In summary, these are just two of several issues that create concerns about the appropriateness of utilizing the income approach to assess M&E value. Contact an accredited professional appraiser to learn more on the topic.