Equipment Appraisal Blog | Understanding Machinery Appraisals

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.

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If you thought the end of the year might bring some normalization to the used vehicle and heavy equipment markets, think again. With two months to go until 2023, there has been little, if any, downward movement in price levels, and best-case predictions are that prices will level off to around 20-25% higher than in 2019-2020.

Even the most optimistic analysis for potential buyers will amount to the fact that normal depreciated loss in value seen year to year for used machinery has not only been wiped out but, has been substantially reversed in the form of appreciation. What is likely to happen is at least another year of inflated values for used equipment until the supply chain issues have been significantly adjusted to allow for new vehicle and equipment manufacturing levels to meet demand again. The effect of this is vastly higher than any typical annual cost of living increase which shakes up every measuring stick used in the past several decades.

This type of market activity has also thrown the appraisal industry for a loop. Recent vintage assets (1-5 years old) can commonly be seen priced where new machinery should be, and even above this level at times. Older equipment (10-20 years) levels are now where you’re used to seeing them for slightly used machines. The longer these trends continue, the more weight appraisers will need to place on this effect.

Common pricing databases are now reflecting these patterns as well. What was once thought to be difficult to support from a longer-term trend perspective is now becoming a permanent adjustment in the market that will likely not reverse even when things start to normalize. Insurance companies will need to consider this if they haven’t already when estimating depreciated replacement cost settlements for personal property. Accountants may see an opportunity to recapitalize their company’s asset values based on the support of the data being presented.

Similar to what has recently occurred with inflation on things like gas and food costs, the price will peak so greatly that when it eventually settles, it will probably remain significantly higher than it was a few years ago. Don’t fool yourself into thinking that the longer-term effects of inflation aren’t a big deal, and that pricing will go back to where it was “back then”. Based on everything we’ve seen in 2022, along with recent predictions from the experts in the field, we should get used to the elevated pricing in the used vehicle and equipment markets.

If you believe an updated valuation of your company’s assets might make sense given these changes in the market, ensure you engage with an accredited, certified appraiser to best understand the effects this may have on your long-term goals.

If you’re like many small business owners who run a lot of heavy equipment every day, you try to keep it operational for as long as possible to avoid purchasing new replacement machinery. Given the added capital investment, as well as today’s supply chain woes, which lead to long delivery delays and increased pricing with new equipment, this is a wise course of action. There may come a point, however, when the decision to retire older machines becomes inevitable.

Every successful company that operates expensive machinery employs experienced, talented personnel who manage day-to-day facility operations. This includes running and maintaining the equipment as well as replacing components, and even rebuilding the equipment when necessary. If done effectively, this leads to an extended economic life for your assets, well beyond their initial estimates.

That is why you will often see equipment and heavy vehicles still operating in the field 20, 30, or even 40+ years since the day they were first built. This can instill a sense of pride as it relates to the longevity of owned machinery, however, companies should consider reviewing annual maintenance and operating costs vs. the potential longer-term impact of buying new replacement assets.

Things to consider in this analysis:

Look back over a 5-10 year period and calculate the average annual cost of operating your machinery. Include factors such as monthly maintenance, refurbishments, component replacements, downtime effects, job completion delays, and anything else that relates to daily operations and project costs.

Weigh these average costs against the investment in replacement machinery, while estimating annual costs to service new debt, reduced operating and maintenance costs, more efficient run time, and project capabilities. The latest technologies developed for new machinery can be a double-edged sword, with a lot of computer-controlled components you need to consider, as well as training personnel to effectively operate them.

At some point, it will become clear when it’s time to make the call and upgrade your fleet of equipment. It’s a difficult decision that is based in part on common sense, practicality, competition, and even emotions. Moving into the next generation of equipment is always a big decision, however, don’t put it off too long before it begins to affect your bottom line.

There will come a time when your business or individual practice will need to appraise your used equipment. You may have a desire to sell and replace with newer machinery, refinance an existing inventory, seek new investors, settle an estate or transfer the assets of the business into a new entity. Depending on the type of equipment you own and operate, the amount of data available to review in the marketplace will range from overwhelming to non-existent

The most difficult step in the process of estimating used equipment value is making sense of the information you uncover, or lack thereof. For commonly resold assets such as construction equipment, trucks, and forklifts, you can find many similar comparisons in the market, however, the range in pricing can vary greatly. On the other hand, if you own a specialized piece of machinery that is customized to your specific operational needs, the resale market will not be the best place to search for information.

Equipment appraisers face these challenges every day, which is an excellent reason to consider engaging with an experienced, accredited valuation expert to assist in this effort. Over time, a seasoned appraiser will have developed sound strategies to reasonably determine value regardless of the type of assets you own. In the meantime, here are a few tips that can help you along the way:

Consider Multiple Sources

It’s not uncommon to see used equipment with the same year, make and model selling for vastly different prices in the marketplace at the same time. This could be due to any number of variables such as condition, hours/mileage, location, and recent refurbishments being completed. Oftentimes it's simply because dealers are testing the waters to see if they can obtain an inflated price given no immediate concern to sell. With all these factors at play, it is difficult to make sense of the varying data.

It’s important to investigate as many distinct sources as you believe reasonable and see if you can determine patterns that will allow you to better value your equipment.

Look at Multiple Perspectives

Given the inconsistent data found in the marketplace, alternate perspectives can bring the valuation process into better focus. Research what you paid for the equipment when you originally purchased it and consider the history of your usage and time since it was acquired. Determine what you believe to be a reasonable useful life for that equipment along with typical levels of depreciation that make sense in the context of your experiences as an owner-operator.

Finally, consider contacting your local equipment vendor to discuss what similar new equipment is selling for and gather their opinions on the current market.

Recognize the Specific Premise of Value You Need to Measure

Appraisers can provide estimates of value at different market levels, and your situation may fall into one or another, as you determine the need to sell. If you are in a hurry to turn your assets into cash, or just don’t have a lot of time to market your equipment, consider an Orderly or Forced Liquidation. If you are selling the assets as part of a larger transaction and the purchaser will be taking over some or all of your operation, then Fair Market Value is realistic, with consideration for applicable installation costs and related expenses to bring the equipment into operation.

In summary, it is always a good idea to consider bringing in an experienced appraiser to help you through this analysis who can develop an independent, unbiased process that will be supported by one or all of these methodologies.

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The COVID-19 pandemic has brought with it many unanticipated shifts and changes. Some of the more prominent of these occurring in the global business marketplace include unanticipated machinery, parts, and raw materials shortages in a number of key industries including construction, transportation, automotive manufacturing, furniture, and technology.

Prior to the COVID pandemic, many regional areas, both domestic and overseas, were experiencing a prolonged lack of economic growth, which led manufacturers to slow production across key economic markets. By the latter half of 2020, these same manufacturers began experiencing historically high levels of demand driven by workplace and consumer lifestyle changes creating a supply shortage.

This supply shortage, coupled with an unabated increase in demand, has resulted in significant price increases and backorder delays for many types of equipment, personal property, replacement parts, and raw materials. The providers' costs to purchase and transport these products have increased so dramatically that some are simply waiting for the market to adjust while others are passing these costs onto their clients who have no choice but to pay now or lose out on precious contracts. The growing concern is that this severe imbalance in the market is not going away anytime soon, and manufacturers will therefore continue to be unable to provide a reasonable product delivery timeline for correspondingly reasonable costs.

The resulting impact in the used machinery & equipment marketplace is one that is fairly obvious. Any business looking to sell or liquidate their excess property is able to find a greater number of potential buyers, leading to a material increase in value for their assets, given the immediate availability to sell. This increased demand may be short-term, or more likely, it will last for the better part of 2022, given the slow lag time before new tangible products are more readily available.

If you’re considering selling used equipment, parts, or inventory, make sure you can easily replace it, either through the company’s existing asset base or with replacement machines that are available at a reasonable price in the market. If you are looking to purchase used equipment or parts, it may be the best option from a deliverable timing viewpoint, however, you may have to increase your budget to reflect this shortage in the market.

From a valuation perspective, an appraiser may or may not take the impact of these market changes into account when completing an assignment. It will come down to the circumstances involved in the overall scope of work effort and their own subjective opinions on the long or short-term effects in the marketplace. Either way, you should look to engage an experienced, accredited appraiser to complete the work.