Equipment Appraisal Blog | Understanding Machinery Appraisals

Being accredited equipment appraisers affords us the opportunity to be aware of the overarching transactions that our valuation work is tied to. In many cases, it is a straightforward buy/sell scenario in which our client is looking to resell used machinery that has become excess to their operation or is being upgraded with newer models.

Most times, our customers request we estimate Fair Market Value, which is the gold standard definition of value when looking at an arm’s length transaction where both the seller and buyer are on an even footing. This level of value is ideal from the seller’s perspective, given that they can expect to receive the best price for their equipment. However, there may be factors involved that will create a different situation.

For example, the owners may not normally be in the business of remarketing used equipment and need to turn to machinery brokers or dealers to facilitate a sale. Banks and leasing companies that recover their equipment and need to resell their assets would also fall into this category.

Time can also be a factor that plays into the equation. Some resellers would prefer to cash out of their used equipment sooner than later, which will result in a level of compulsion on their behalf that will ultimately affect the sale price.

In these situations, the seller needs to understand what a reasonable range of value is so they can be realistic with expectations when entering the unfamiliar scenario of reselling their used equipment.

Appraisers can greatly assist with developing this range as they can suggest to the client that they include both an Orderly and Forced Liquidation Value along with the Fair Market estimate.

Having two or three different value premises to consider instead of one will provide realistic expectations depending upon the situation the seller finds themselves in. If they would rather avoid being directly involved in the resale effort altogether, they might consider placing their assets in an auction, which would be more in line with forced liquidation. Or if they end up selling directly to a used equipment dealer, they may look to realize an orderly liquidation value level.

Whatever situation you find yourself in when needing to resell used equipment, consider looking at a range of values, which can be accomplished by speaking with an experienced appraiser who understands the differences and can help steer you in the right direction.

If your business requires a lot of machinery and/or vehicles to operate every day, there will come a time when you need to replace older models and upgrade your inventory to stay ahead of the competition and improve efficiency. If you don’t have decent trade-in options or decide to try and maximize the resale price by selling privately, you will want to better understand current market value levels.

The first thing you can do to accomplish this is to find an independent accredited equipment appraiser who can provide you with a supportable assessment of value, which will assist you throughout the process and offer additional perspective on where you can expect your resale price to fall.

The professional appraiser can provide a range of values at different market tiers, which you can use to leverage and support a fair sale price while negotiating with potential buyers. Here are the steps involved with locating and engaging with a qualified equipment appraiser:

1. Once you locate and reach out to a valuation expert during your search process, they will contact you and ask for the specifics involved with your situation and request a detailed asset listing, which will assist them in understanding the amount of work involved and provide you with a fee quote. During this phase, the overall scope of work can be discussed, including the types of values needed (typically Fair Market and Orderly Liquidation), while determining whether a desktop or an on-site appraisal is more appropriate. Cost, timing, and the details you have available will all play a part in this.
2. As soon as you are engaged, you will work further through the process so the valuation professional has the best understanding of the equipment you are selling so they can provide you with a supportable appraisal.
3. When the report is delivered to you, it will include itemized values for each piece of equipment at the tiers agreed to, along with the total for all the assets involved. If you had earlier determined that Fair Market and Orderly Liquidation are the best types of values to estimate, you would have a range to work within when setting initial pricing and ultimately negotiating a final sale.

In summary, working with an appraiser in the early stages of your plan to resell older equipment will give you a distinct advantage that will provide you with the best chance to maximize the realized sale price of your used assets.

We see many instances where business owners and individuals no longer need to operate used machinery or have recently acquired older equipment and personal property as part of a larger purchase or estate settlement. In any of these cases, the assets are no longer useful, and there becomes a need to decide the best option for transferring ownership.

The first thought is usually determining the ability to sell or liquidate the assets; however, this process may be difficult, especially if demand is limited or the owner is unfamiliar with the potential resale markets. As an alternative, donating the property to a local business, university, training school, or non-profit organization might be a better choice. The benefits of a tax deduction and supporting your community or alma mater might outweigh the uncertainty and time-consuming process of trying to sell the items on your own.

Before you decide which options are best, it is a good idea to consult with your accountant as well as an accredited professional appraiser, especially if you know the total value of the donation will be significant. The IRS rule is that an independent appraisal is required as part of any deduction claim in excess of $5,000. You must also include Form 8283 as part of your income tax filing. The form needs to be signed by you, the appraiser, and the party you are donating to.

The cost of the appraisal can sometimes become a challenge in comparison to the tax benefit. For example, suppose you have dozens of small items that are being donated together, and all need to be appraised. In that case, the total value might not support the cost given the valuation process will be time-consuming. You need to broadly calculate your expected tax deduction by approximating the total value of your donation and multiplying it by your estimated adjusted income tax percentage.

As an example, a $50,000 donation would result in a $10,000 deduction for someone in the 20% tax bracket. If the appraisal costs $5,000, you will end up with a $5,000 overall benefit for the donation. A lower overall value for your donation will create a more price-sensitive situation regarding the appraisal cost, and vice versa.

It is important to review and discuss these scenarios with your accountant and the appraiser to try and create an affordable option that makes sense for you. Grouping together some of the less expensive items for the purpose of valuing them might be one viable way to save on the time and cost of completing the appraisal. The focus can then be placed on the higher-valued property for the purpose of detailing and itemizing the report.

At least once a year, business owners will take stock of their current operation, while planning for the coming year, determining what changes may need to be implemented to continue on a successful track. One of these improvement areas might pertain to the sale of certain used equipment, which are now considered too old to maintain effectively or are in excess of existing production needs.

It can be challenging to take this project on alone, and fortunately, there are options you can consider that can facilitate the process. Here are a few to think about:

Sell or Trade to Your Dealer

Similar to selling your personal cars or trucks, the first place you might think of is the dealer who sold you the equipment when it was brand new. If you’re looking to replace your older assets with new models of the same manufacturer, the local dealer should provide you with trade-in options. Even if you don’t plan on buying a new machine, they may offer to purchase it outright at or near a trade-in level value. If not, they may agree to broker your used equipment through their resale networks for a reasonable commission once sold.

Listing in Online Trade Journals

There are several reputable national websites available to consider listing your used equipment with. Virtually any type of machinery or vehicle is supported by these platforms. They offer a large network of sellers the ability to list their assets with exposure to thousands of potential buyers. You can include photos, detailed specifications, asking prices, and your direct contact information with the listing. If you are not in a rush to liquidate your used equipment, you might want to consider this option as it may ultimately realize a higher resale value for a low cost.

Auctions

The auction industry continues to grow every year and provides sellers with an option that is a one-stop, fully managed effort, from the marketing, resale, pickup, and delivery of your used equipment. The booming growth of online auctions, especially post-pandemic, makes this option even more attractive, as the number of potential bidders has expanded to those who cannot physically attend the sale. The auction route has more costs and risks, given the ease of the process and more immediate outcomes. You should, therefore, research and determine the best auctioneer to work with who can mitigate these concerns for you.

Understanding orderly liquidation value in your equipment is just something most business owners never consider. Why? In general, liquidation is considered by most business owners to be a sign of failure, such as a bankruptcy liquidation. But there are a number of circumstances in which you may need to have an equipment appraiser perform a liquidation machinery valuation that have nothing to do with financial trouble in your business. In this post, we'll take a look at which circumstances may call for orderly liquidation equipment values and why this type of appraisal is used in those situations.

How businesses work: understanding orderly liquidation value in your equipment

What is orderly liquidation value?

Orderly liquidation value falls between forced liquidation value and fair market value in terms of monetary compensation. It's calculated under the assumption that the piece of equipment or machinery must be sold, but that there is a longer period of time to do so, such as a few months. You would receive less than you would at fair market value, but receive more than you would under a forced liquidation.

How is it different than fair market value?

Fair market value assumes that the equipment would fall under normal exposure in the market place before being sold for what is perceived as a fair price to both the buyer and seller. There's no serious time limit on how long the equipment would be offered for sale, so it would be sold for a higher price than in an orderly liquidation scenario.

How can orderly liquidation equipment values impact my business?

When you're getting ready to sell a business, knowing the orderly liquidation values allows you to gain quick cash to help with financing or to provide an additional buffer during the sale process if things don't go as smoothly as you'd like. When you're purchasing a business, knowing these values allows you to relatively quickly sell some of the excess equipment to pay down debts or meet other needs during the process. 

In what kind of situations is orderly liquidation value used?

In many circumstances, people involved in a business need to receive money relatively quickly for a number of reasons, but are willing to wait a reasonable amount of time to ensure they're getting more from the sale of that asset than they would through a forced liquidation. This can include the breakup of a partnership, the dissolution of a marriage where both individuals were involved in the business, the sale of excess equipment in anticipation of closing a business sale, an unexpected death of a business partner or similar scenarios. By providing additional time, the party that is leaving the business or their heirs will then receive money for the equipment that is sold without having to either lose out on the machine's value through a quick sale or wait a long period of time for it to sell using conventional methods and fair market value.  Banks also often lend based on Orderly Liquidation Value.

As you can see, there are many different situations where understanding orderly liquidation value in your equipment is important to your bottom line. When you need equipment appraisals, it's important to work with an equipment appraiser who is certified, because the certification training process ensures they know which standardized methodologies to use in which situations. Why is that important? Standardized methodologies are developed to stand up to strong scrutiny, including legal, insurance, financial and tax circles. Getting a quality equipment appraisal is vital to your bottom line.