Management guru Jack Welch once said, “You got to be rigorous in your appraisal system. The biggest cowards are managers who don’t let people know where they stand.” He was discussing performance appraisals and measuring how well people are doing their jobs, but the same is true when determining the value of physical assets. If managers aren’t aware of the worth of a particular piece of equipment, they will struggle to evaluate how much value it contributes to the business. They will remain unaware of whether or not it efficiently aids operations. They will remain unable to apply for certain kinds of loans. And they will not be able to have any confidence about receiving a fair price when time comes to sell it on the secondary market.
In this article, we will explain what machinery and equipment appraisal is, why you should perform one, how they work, and what you should expect during a machinery appraisal. We also can recommend some of the best and most trusted appraisers in the business.
What Is a Machinery/Equipment Appraisal?
Let’s imagine a hypothetical farmer or corporate farm operation. For various reasons (some of which we’ll discuss in the next section), the business needs to figure out what several pieces of equipment are worth. An old harvester. A new tractor. An irrigation array with an advanced centrifugal sealless magnetic drive pump. How should the individual or corporation go about doing so?
Determining the value of a farm’s assets without a farm equipment appraisal or farm machinery appraisal poses several challenges. For instance, book value (an accounting measurement defined as purchase price less accumulated depreciation) rarely provides an accurate estimate of equipment’s true worth. Other options — such as relying on third-party data, having a lender make an estimate, or simply asking the owner for a best guess — are scarcely more accurate.
This is where a farm machinery appraisal, heavy machinery appraisal, business machinery appraisal, or similar appraisal depending on your specific sector comes into play. These kinds of valuations are conducted by certified appraisers, who have specialized education and training, adhere to rigorous ethical standards, follow legally defined guidelines, and submit their finding in a universally recognized format. In short, any light or heavy equipment appraisal offers a definitive answer as to what an asset is worth in a way that should be understandable by and acceptable to everyone.
Why Perform a Machinery/Equipment Appraisal?
Why should a company choose to perform a new or used equipment appraisal? Why couldn’t it simply rely on some of the less accurate methods we mentioned previously? Well, businesses often need to value machinery and equipment at regular intervals for a variety of reasons, and many of those reasons are legally binding. That means simple, off-the-cuff estimates won’t do. Some of these reasons include:
- To secure lending
- To sell equipment
- For support during litigation
- To facilitate a merger or acquisition
- To facilitate the valuation of a business
- To dissolve a partnership
- To facilitate bankruptcy proceedings
For all of these, businesses will need to perform an appraisal.
What can I expect during the process?
Like many technical topics, getting an appraisal sounds easy in the abstract, but somewhat more intimidating in concrete situations. If one had to generate a sort of equipment appraisal template for what a client should expect, then it would contain these general steps:
- Defining the scope of the work
- Collecting applicable data
- Analyzing the data and determining a valuation method
- Conducting the appraisal
- Delivering the results
Let’s analyze these steps in more detail.
Step #1: Defining the scope of the work
Any successful enterprise must begin by defining terms and setting boundaries. The first step involved is to determine who exactly will be using the appraisal, what that intended use will actually be, and what exactly will be valued. There’s a large difference between appraising a single piece of equipment and that contained by a whole factory. Similarly, so-called desktop appraisals (in which an appraiser doesn’t personally view or evaluate the equipment) are significantly different from traditional approaches.
Step #2: Collecting applicable data
During this step, the appraiser would collect any and all applicable data regarding the equipment in question. This would include personally inspecting the machinery, determining its condition (including its maintenance history and expected lifespan), and surveying the wider market for similar equipment. Only once this has been completed can an appraiser begin what would be considered the appraisal itself.
Step #3: Analyzing the data and determining a valuation method
In order to analyze the data after it has been collected, appraisers must select a valuation method. We will discuss these in more detail down below, but suffice it to say that there are three accepted methods: the cost approach, the comparable sales approach, and the income approach.
Step #4: Conducting the appraisal
This is the point at which the appraiser generates an appraisal. The process includes creating an initial draft and reviewing it for errors and omissions. Once that has been completed, the appraiser will generate the final report.
Step #5: Delivering the results
During the finalizing process, appraisers will often let owners see the draft in order to clear up any misunderstandings or oversights. However, this shouldn’t be construed as a delivery. Only once the analysis has been “locked in stone” (so to speak) can the appraisal be properly delivered to the equipment owner.
Methods of Valuation
Because determining a piece of equipment’s value is arguably the most important aspect of an appraisal, discussing the methods by which appraisers arrive at their conclusions deserves its own section. Valuation is a complex subject, and you’ll find numerous approaches to it, including the following:
- Replacement Cost New
- Reproduction Cost New
- Historical Cost
- Insurance Replacement Cost New
- Insurance Reproduction Cost New
- Original Cost
- Fair Market Value Severed
- Fair Market Value In Place
- Fair Market Value In Use
- Actual Cash Value
- Liquidation Value In Place
- Orderly Sale Value
- Forced Liquidation Value
- Orderly Liquidation Value
- Scrap Value
- Salvage Value
In theory, though, all valuation methods break down into one of three categories: the cost approach, the comparable sales approach, and the income approach.
The Cost Approach
The cost approach asks the question, “How much would a reasonable individual expect to spend to replace this asset?” It takes into account depreciation, which can also be broken down into three types that surpass the accounting concept of depreciation. Physical depreciation involves physical wear on the equipment. Functional depreciation refers to loss of efficiency or productivity. And economic depreciation takes into account external factors such as technological advancement.
The Comparable Sales Approach
The comparable sales approach often finds use in real estate and involves examining comparable sales (“comps”) of similar items in the general market. The comparable sales approach seeks to match the equipment’s current condition as much as possible, taking into account its age, condition, size, and time of sale.
The Income Approach
The income approach is rarely used in machinery valuation due to the fact that it involves discounting future streams of income to present values by using an industry-accepted capitalization rate (i.e., anticipated rate of return). While commonly employed to value whole companies, the income approach doesn’t work well with machinery because most types simply don’t generate the required income data.
How long does an appraisal take?
Unfortunately, there is no standard time frame for an appraisal. The length of a valuation will depend upon factors such as the type of asset, the number of items to be examined, the availability of documentation and data, and the schedule of the appraiser.
What will a certified appraisal cost?
Similar to an appraisal’s length, the cost will also vary depending on the project. In general, the greater the number of items to value and the greater the difficulty in gathering the required information about it or them, the greater the expense.
Getting an appraisal may seem like a hassle, but it’s often an essential part of selling a piece of machinery. And once you know what your equipment is worth and time comes to sell it, consider listing with Surplus Record. For roughly a century, we’ve helped businesses across a wide range of industries successfully sell their unwanted equipment.