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.

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Many small to mid-size businesses that utilize a lot of machinery will likely have several older pieces of equipment that still operate efficiently and effectively. As long as maintenance practices have been steady over the years, older equipment will continue to be an important component of your company’s operation, and you can avoid the need to spend a lot of money replacing them.

When you look at how these older assets depreciate and resell in the used markets, you soon realize that once they hit a certain age level, their value will begin to level off, assuming they’ve been taken care of over their lifetime.

As a general rule, many types of machinery and equipment will depreciate more during the first half of their useful life and slow down considerably over the second half. That is due to factors such as lapses in warranties, no recapture for initial up-front sales costs such as taxes, freight, rigging, and overall secondary market behavior, which, over the years, has created this pattern based on the buying and selling habits of equipment owners.

The closer machinery gets to the end of its life, the slower this annual loss in value will be. Depending on the type of equipment, once it falls within a certain age range, say 10-15 years old, you will see no material difference in what those same models sell for in the secondary market. Even 20+-year-old pieces of machinery, considered well past their normal life will resell at similar levels as long as they remain in operable condition and have had components parts replaced when necessary.

This concept is also bolstered by the highly active secondary markets for used equipment with both private and public sales activity reaching billions of dollars every year. As an example, if you track this activity, you will commonly see a 15–20-year-old wheel loader sell in the same price range as a 10-12-year-old machine. Of course, there are other variables at play, such as the commonality and availability of certain model types, condition, and competition, however, the fact remains that older assets will have a much smaller value differential than newer machines.

The practices of owners and operators, as well as the buyers and sellers of used and new machinery, have helped create this pattern, and it has remained consistent over the decades. There is no denying that equipment loses much of its original new value over time. Once you better understand how it depreciates year to year, the more knowledge you will have when you are in the market to buy and sell these types of assets.

Many businesses have been feeling the sting of unprecedented economic change since 2020 for reasons I don’t need to elaborate on. By now, we all understand the toll these past couple of years has taken on a broad range of companies, across a multitude of markets and industries. Those fortunate enough to not be overly affected by these challenges have done so by the skin of their teeth, and, therefore, the vast majority are counting their pennies a bit more closely when it comes to variable expenditures.

An unplanned variable expense you might be considering could be an appraisal, either for newly acquired or existing machinery & equipment, industrial & commercial real property, or an overall business valuation. When budgeting for expenses that are not already engrained in your company, the question may arise as to whether the benefit outweighs the cost. Is this type of expense absolutely necessary, or can your business live without it for another year or so

Some unforeseen costs are necessary but have no beneficial measurement, such as increases in overhead, like rent, insurance, and maintenance/repair costs. Others, such as asset valuation, can be weighed against the potential to save money when acquiring used equipment, or maximizing potential value in a sale or financing transaction.

When weighing these costs, it is important to consider paying a bit more for a better quality product, which will provide the best “bang for your buck,” with the benefit further supported by an experienced service provider, who won’t sacrifice quality to provide the cheapest available option.

It is always a difficult decision when entering into a relationship with any new vendor or contractor, to choose a business that not only fits with your company’s profile but can remain a long-term option, should you need to complete the process again down the road. An accredited, certified appraisal professional is one of those types of providers who will fit both your short and long-term needs, and make the expenditure easier to justify, given the overall benefit you will reap as a result.

Supporting variable costs will always be a difficult challenge facing businesses every year. Making sound decisions will come down to choosing the right partners who understand your requirements and will provide the best overall product that maximizes future benefits.