Equipment Appraisal Blog | Understanding Machinery Appraisals

One of the most common misconceptions in the world of machinery and equipment (M&E) valuation is that desktop appraisals are not as reliable as those that include an on-site field visit. There is no difference in the credibility or supportability between the two, as long as the steps taken to obtain sufficient detailed asset data are completed properly.

The fact is that the vast majority of M&E appraisals are conducted as desktops. From my own experience, 75-85% of projects do not include a personal visual inspection of the equipment. I would bet those statistics are fairly consistent across the industry with my competitors.

There are a number of reasons why this occurs. Here are the most common:

• Cost to the Client: On-site appraisals require additional time and expense for the appraiser to complete, which naturally dictates higher fee quotes. In some cases, it can be twice as much or more than a desktop option. Ability to Obtain Sufficient Detailed Data from the Client: Using today’s advanced technology, along with effective communications, it is much more efficient to obtain the needed information without putting undue burden on the client.
• Low Transaction Size and/or Number of Assets Involved: It may simply not make economic sense relative to the size of a deal or if only a handful of items are involved.
• Condition Assumptions: Appraisers typically assume normal operating conditions and wear and tear when completing appraisals unless specifically told otherwise. The majority of accredited valuation professionals are not mechanics or technicians, and can only carry out a general visual verification of the equipment when in the field.
• Timing Constraints: Many appraisal projects are conducted over a short timeline where the client needs the work completed in a tight window. The majority of the appraiser’s focus should be on research, analysis, and report writing to meet deadlines.

Of course, there are times when a personal on-site visual inspection is necessary as part of the overall valuation effort. For example, the Small Business Administration (SBA) requires inspections to be completed when underwriting equipment financing transactions that are over a certain minimum threshold. In other cases, conducting the fieldwork may be the only option for obtaining the necessary asset detail required to complete the appraisal. It may also simply be the client’s preference that the appraiser come out and conduct the work personally.

To learn more about your best options when needing an M&E appraisal, reach out to an experienced, accredited professional who can take the time to discuss this topic further.

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There are times when a machinery & equipment appraiser needs to include a visual site visit inspection as part of their valuation assignment however, due to scheduling, location, or cost concerns, cannot complete the fieldwork themselves. When this occurs, it is imperative that an alternative game plan be developed to ensure the inspections are completed in a timely and professional manner while still obtaining the critical information an inspection normally produces.

One option is to engage with a collateral inspection company whose primary job description is physical asset verification. There are a handful of these types of firms in the marketplace, and most have a significant number of employees and contractors spread across the country that enables most inspections to be handled locally.

Ordering the inspection is a fairly straightforward process that can often be done by completing digital forms found on its website. These will provide them with the type of equipment, location, contact, and timing information. If necessary, you can add specific detailed instructions to the work order and directly engage with the local contacts if this level of management is required. You can track the progress of the scheduling and once the job is completed, you will receive a report that includes a number of photographs to go along with the asset verification report. Utilizing this type of equipment inspection service is typically cost-effective and efficient, and can be expedited in just a couple of days for an additional fee if preferred.

From the appraiser’s perspective, it is important to know when this service makes sense and when it might not be the best solution. Collateral inspection companies are not appraisers, nor do they usually have the expertise required to create a detailed asset listing from scratch in cases where the equipment detail you receive in advance is incomplete or non-existent. There will always be situations where you, as the accredited, experienced appraiser, will need to go out yourself and gather the detail necessary to properly identify and describe the assets to complete a credible valuation.

The quality and quantity of the data an appraiser receives at the beginning of an assignment will generally dictate if an on-site visit is required and, if so, whether a collateral inspection firm would be a good fit to assist with the fieldwork. Every valuation project is unique and it is the responsibility of the appraiser to understand how best to tackle the scope of work and deliver a reliable report.

Machinery & Equipment appraisals generally require an itemized asset listing to be presented to the valuation professional so they can understand the history and detail behind the assets and estimate the scope of work and associated time and costs involved to complete the project.

Businesses that own a significant amount of tangible property, but have not updated their internal records in a long time, may decide they don’t have the resources available to undertake the time-consuming task of compiling all this data. The sensible alternative may be to have the appraiser visit your facility and work with you and your team to effectively and efficiently accomplish the task.

Even cases where your machinery listing is current but not well detailed may bring about the need to have an on-site visual inspection completed to ensure an accurate and thorough result. Desktop valuations, where you provide all the information to the appraiser, work when there is enough data to comfortably understand the descriptive detail provided in an easy-to-read file format. Ideally, appraisers like to see the year (or effective age) of the equipment, as well as the make, model, VIN/serial number, and any additional options or specifications that might apply. Photographs will also need to be reviewed to reasonably estimate the condition of the machinery. Follow-up interviews with the appraiser may be required to confirm the details being reviewed.

If you choose to have the appraiser complete the field work and gather all this themselves, it can save you hours, if not days, and will provide a more personalized perspective for both parties to understand all the facets of the valuation effort, as well as the underlying transaction it will be supporting.

The cost variance between an on-site appraisal and a desktop can be significant, depending on where your business is located, the number and type of assets being appraised, and the overall logistics involved with the scope of work. Look to engage an experienced, accredited appraiser, who can facilitate the process with you, and can effectively work with your team to accomplish the task.

The benefis will far outweigh the cost, from both a short and long-term perspective, as you will be able to better accomplish the immediate tasks at hand, and have an updated, detailed, and accurate equipment listing going forward which you can use to maintain your records in the future.

When it has been determined by you and your equipment appraiser that a personal site visit will be part of the overall valuation effort, there will be a few things to plan for ahead of time as well as during the inspection to ensure an efficient and effective process. Here are the two most critical items to prepare before the appraiser arrives.

Preliminary Asset Records

For an appraiser to quote a valuation project, they will require an understanding of the asset content of your business. If there are only a handful of assets involved, creating an updated detailed listing of the equipment is feasible. If, however, a complete facility appraisal is in order, involving dozens of items, this option will be very time-consuming.

The most common source of documentation immediately available to you will likely come from your accounting department in the form of a capitalized asset depreciation record. This is a good place to start, however, many companies don’t detail all their equipment on this listing and tend to abbreviate descriptions. The three most important components the listing provides to the appraiser is the asset type, year acquired, and acquisition cost. Once on-site the appraiser can work with you during the inspection to fill in the remaining details and add unlisted equipment as necessary.

Scheduling the Site Visit Inspections

Depending on the reason the appraisal is needed, and the type of equipment being valued, the coordination of the inspection process can be a bit tricky.

If the company is being sold or acquired, employees may not be aware of the situation and may become concerned over why an appraiser is spending the day walking around the facility and taking a lot of photographs. There are a couple of options to consider in an effort to alleviate these concerns. The first is to provide an explanation to your employees that supports the reason an appraiser is on site. The most common ones I see used by business owners are that their insurance company or financial institution they utilize requires this as part of a general compliance audit.

The second option is to complete the inspections after hours or on a weekend when the facility is closed. This option also works well when transportation equipment is involved, such as delivery trucks and trailers. These assets are usually on the road during normal hours and will be stored on-site at night and on the weekends, creating a convenient time to complete the work in a timely fashion.

In summary, ensure you engage with an accredited, experienced appraiser, who is familiar with the steps involved and can assist and suggest the best way to move forward seamlessly. A seasoned machinery & equipment appraiser has been through this process many times and will become an asset to you and your business as you work through the sensitivities involved with an on-site appraisal.

Every equipment appraisal can be classified as either a desktop or an on-site. A desktop is one in which the equipment is not physically viewed by the appraiser, who instead relies on the client to provide the necessary data required to properly describe, identify and value the property. The on-site option includes the appraiser personally inspecting the assets during the initial phase of the project to obtain all this information directly.

There are pros and cons to each option, and given the circumstances of each project, one may clearly be more preferred, while in other cases, it will come down to a decision based on cost, efficiency, and/or logistics. If the appraiser you’re working with is highly experienced, they can often suggest the better option based on their understanding of the overall scope of work and the asset mix. Either way, both options are reliable, defensible, and supportable, as long as the appraiser obtains the necessary data to get the job done.

Here are a few of the important factors that go into the determination of engaging in a desktop vs. an on-site equipment appraisal:

Quality of the Data Available: Depending on the level of detail provided by the client, and their ability to obtain the necessary specifications and photographs for the equipment, an on-site valuation may be the most effective option.

Number of Assets and Overall Value: Generally speaking, the larger the transaction and the greater the number of assets, the more likely an on-site appraisal would be preferred. There are typically adjustments, such as new assets purchased and older machinery being retired, that don’t show up on the available listings and can be verified on-site. In addition, the higher appraisal fees associated with personal inspections can be better justified in relation to the overall project.

Cost: The travel and expenses of the appraiser getting to the site(s) and spending the necessary time to inspect, take photographs, meet and interview key company personnel needs to be weighed against the benefits. Locality: The ease, or lack thereof, of traveling to the facility. If the business is close to a major city or way out in a very rural environment, may factor into the decision. Spending an inordinate amount of time getting to and from the sites can oftentimes create a cost inefficiency.

Timing: If there is a very tight timeline to complete the valuation, the desktop option may be the only reasonable approach to meet the delivery deadline. Scheduling and executing the on-site work can take anywhere from a few days to a couple of weeks.

Transactional Hurdles: Depending on the client and scope of work, it may be a requirement to include an on-site personal inspection by the appraiser as part of the process. This may come into play with financial institutions, the SBA, litigation cases, business disputes, and tax authorities.

As an appraiser, completing the site work independently results in a better understanding of the specific business application of the assets and allows for greater control over the data gathering process, while providing a hands-on personal experience. However, as long as the information available to the appraiser is of reasonable quality, the desktop option will be more than adequate. In all cases, the machinery & equipment appraiser should be able to guide you through the scope of work process which will ultimately determine the best options for you.