Equipment Appraisal Blog | Understanding Machinery Appraisals

After almost 40 years of working in the machinery and equipment markets, I find it fascinating how so much has changed but many things remain the same. Whether it involves financing and leasing, asset management, buying and selling, or independent valuation, the methodologies and mechanics of these industry sectors working together to be successful have been consistent for decades.

From an appraisal perspective, you don’t need to be an expert in any one type of market or industry to estimate value effectively. The principles and methodologies learned and practiced within the M&E appraisal profession do not change as the asset types vary. Gaining experience and developing a sound and supportable technique for appraising is the key to becoming a well-regarded appraiser.

Here are a couple of topics to think about that might help you along the way as you continue to develop your valuation skills and expertise:

Initial Information Gathering:

Obtaining the details behind the equipment you are appraising is a critical first step in providing a credible appraisal. Variables such as the year, make, model, serial number/VIN, hours/mileage, original cost, and any relevant specifications and documentation are all important to obtain. Communicate with the current owner to gain a basic understanding of the history of the machinery and gather any detailed itemized listings and support data that might be available.

Gather a Broad List of Sources

During the research process, try not to put too much weight on any one source when it comes to estimating value. Multiple perspectives from varied market sources can provide you with a balanced amount of information that you can review to ultimately form your own opinion. Remember that this is your appraisal, not simply a parroted version of someone else’s.

Don’t Rely on One Approach

From my experience, it is beneficial to consider and weigh the appraisal from both the Cost Approach and Sales Comparison Approach. Regardless of how much resale data might be available for any piece of equipment, it is also beneficial to understand the new replacement cost, useful life, and typical market levels of depreciation and obsolescence that occur with machinery and equipment. Combining the elements of both approaches can create a check and balance type system for your analysis and provide a sanity check to all the data gathered.

Like anything else in life, experience is gained by doing, and each year you can continue to hone your skills to become a better equipment appraiser.

Machinery & Equipment (M&E) valuation relies in large part on understanding the new and used trade markets and developing an analysis that reasonably reflects what the particular assets being appraised would be worth in those markets. Another important component of an M&E appraisal is looking internally at the business that is or was directly involved with the most recent purchase and operation history of the equipment to understand the facts behind this.

The additional perspective an appraiser receives by learning this history is critical to making potential adjustments to the market information they research. This history provides in-depth specifics for the machinery actually being valued that can’t be disputed. Every piece of equipment is unique in its own way. There may be somewhat different specifications between the assets being valued and what is available as a comparison in the market. Materially different hours or mileage may become a factor to consider as well as any recent upgrades or refurbishments completed.

Knowing the original purchase price of the machinery, even if it was acquired several years ago, will assist in reasonably verifying that the replacement cost estimates you determine are accurate. Appraisers cannot blindly assume all the independent market information they uncover is 100% bulletproof, as sources can be limited in their ability to provide all the right answers. This is perhaps the biggest challenge in the equipment industry. Unlike business valuation, where databases and historical financial data are almost always available, or real estate, which has a tendency to provide a wide array of published comparable property resale data, the machinery markets can behave in very inconsistent ways.

You will commonly see the same makes and models of equipment, with virtually identical specifications and usage, listing and selling for vastly different prices. The auction marketplace, which reflects billions of dollars of used equipment sales annually, experiences varying levels of demand, any of which may play a part in developing values for many types of assets. With the recent growth in online auctions across these markets, these disparities can be even more pronounced.

In summary, the historical data you can provide to an appraiser that complements their independent research and analysis will be very helpful in ultimately determining a reasonable and supportable value for your M&E.

A lot of people have probably heard the title phrase spoken informally when discussing the value of their truck, car, or piece of equipment. Possibly when they are seeking financing for the sale of used machinery or negotiating with a potential buyer or seller.

Is there any truth or logic behind this statement? That depends on if you are an equipment dealer, an appraiser, or a casual used machinery investor.

I heard a professional speaking to a group the other day about selling equipment in a very “down” market, where the industry was being perceived as potentially dead or dying. The equipment associated with this industry was being sold for pennies on the dollar during this period, by those in desperate need of turning the assets into cash. The machinery was fully operational and had years of useful life remaining.

On the flip side, is a 15-year-old truck-tractor with 1,000,000 miles worth 90% of what a brand new one would cost today? If you look at trade journals in the current marketplace, you will see these inflated asking prices as sellers try and take advantage of an unprecedented world economy we are in the midst of today.

From this appraiser’s perspective, these types of sales should be considered outliers to any reasonable, common sense comparable sales approach to valuing similar assets. If a business owner or investor is not willing to take a broader look at the market or industry they are working in, through impatience or necessity, then how they react in these situations cannot measure the true value of their underlying machinery.

Even the most cyclical, volatile markets will reveal a historic pattern over time that will likely continue over decades to come, regardless of what the doom and gloom prognosticators will try to tell you. Yes, there will be assets bought and sold at the peak and nadir of these cycles, however, any and all of these should be adjusted to truly measure the realistic value of machinery & equipment.

The sales comparable approach can sometimes lead an appraiser down a misleading path when used exclusively, and without consideration for ignoring sales that fall well outside of a long developed pattern, and in consideration of very unusual market behavior. As a complement to this data, take a realistic look at how these assets have generally depreciated in the marketplace in years past, based on their age, useful life, maintenance, and selling cycles in an adjusted, normalized market.

I am not saying these cyclical conditions should be completely ignored, but instead considerably tempered when distinguishing what an asset is truly worth vs. what someone is willing to pay for it in unique circumstances. How the appraiser subjectively weighs all of this information to formulate their opinions of value will vary, however, those who take the time to look at multiple perspectives will be able to bring sense to an otherwise unusual scenario.

When appraisers are tasked with valuing equipment in industries which are continuously evolving due to events such as technology improvement, law and regulation revisions, or new government initiatives, how do they adapt to the likelihood there will be limited market data and comparable resale information available to consider.

Some of these ever-growing markets include biotech, cannabis, solar energy, and electric-powered vehicles. There are businesses popping up all the time in support of these industries that need capital to withstand the early stages of growth and become successful. The assets of these companies will be limited to the property and equipment being acquired to operate, with many types of machinery having little to no resale history to research and estimate value for.

The fact is that appraisers come across these types of challenges quite often, even with long-established businesses that operate customized equipment with similar limitations in the secondary marketplace. So how do they adjust their approach knowing that comparable sales data will be virtually non-existent for these types of machinery?

Fortunately, an experienced, accredited appraiser understands there are two primary methodologies that are established and supportable, especially when used in tandem, to complete a reliable and defendable equipment valuation. Once it is determined that comparable equipment resale data will not be a factor to consider, the appraiser will look to contact the manufacturers and vendors involved with the specific build, as well as similar types of equipment in the market.

The focus of the discussions should revolve around opinions of replacement cost new, useful life, and reasonable levels of market depreciation expected over this period. They can also gather general research on the equipment and overall marketplace available from relevant third-party websites with experience in the industry, to better understand the ability to resell the equipment in the future.

Another important component will be obtaining and reviewing the actual investment for the equipment, including the purchase price and costs associated with the installation. This can be found in documents such as purchase orders, quotes, invoices, and capital asset accounting records.

Once the research is completed in these areas, the appraiser can reasonably estimate value for these more unique and specialized assets, that have little to no resale history associated with them. The ability to still consider market sources under this type of approach will balance the investment cost information provided by the business, resulting in a reliable appraisal.

These emerging and expanding markets will eventually have a history that an appraiser can rely on going forward, however, the ability to adapt and utilize the resources available in these early stages, is critical to meet the current challenges appraisers face today.

Regardless of the industry you work in or the business you own, there will likely come a time when you need to obtain an updated equipment appraisal as you continue to transact in the marketplace. Whatever future plans you have for your business, it is very likely that an appraisal of your capital assets will be beneficial to the process, and possibly even a requirement.

Here a few of the most common reasons why an updated equipment appraisal will be a valuable resource for you:

Bank Financing & Leasing

The most common instance where an appraisal is beneficial and required by all the parties involved occurs when you look to raise capital to maintain and grow your business. The traditional process is working with banks, leasing companies, and similar financial institutions who will require a review of the company’s assets.

If your business requires machinery & equipment to effectively operate, as most manufacturers and service providers do, an updated appraisal will support the current value of your machinery as part of the loan approval process. These assets may end up being the primary collateral the finance company needs for you to successfully secure the loan you need.

Private Equity Investment

A secondary source your business may need to secure capital is in the form of private investment, in the form of equity, which will allow your business to expand its resources and promote growth.

These investors may want to acquire a stake in your business before laying out cash, which will need to be supported by a valuation of your company and the underlying capital assets. Machinery & equipment items generally support a long useful life which will translate to value retention over time and therefore, these assets will comprise a significant component to the overall business value.

Buying & Selling

If you’re considering buying or selling a business, or distinct machinery & equipment as part of a larger transaction, you will want to consider an appraisal to confirm your assumptions about the value of these assets. The time and tension involved in successfully negotiating a sale is significant enough to have a third-party experienced appraiser provide you with the assurance that your pricing strategies are supported and credible.

Tax, Accounting & Insurance Compliance

Tax, accounting and insurance requirements are numerous when it comes to maintaining compliance with all of these facets of your operation.

Tax assessments and regulations, accounting standards guidelines for capitalizing and depreciating your equipment, and adequate insurance coverage are just some of the boxes you need to check in these important areas. Routinely communicate with your accountants and agents to ensure you are up to date on these requirements and see if an equipment valuation might benefit the process, both long and short term.

In summary, your company’s revenue and income typically fluctuate over time depending on the markets and industries you operate in however, the value of your machinery & equipment will likely remain steady through these periods. Understanding the current value of your machinery & equipment by hiring an accredited, experienced appraiser will benefit your business across multiple fronts and provide you with peace of mind as you go forward into the future.