Business equipment is more than just machinery, it’s an asset that goes on your balance sheet and can support your business financing needs. Here’s what you need to know about appraising its value.
Having your business equipment appraised means hiring an expert to provide an unbiased opinion of what it is worth. This independent valuation can be helpful when you are dealing with outside parties who want to be confident that the reported value is accurate and objective. In many cases, the work will be carried out by an accredited, qualified professional equipment appraiser.
There are many reasons why you might need an objective appraisal of the value of your equipment, including:
There are many methods of appraising equipment, and the method you choose can depend on several factors. These include the reason for the appraisal, the available data, industry standards, or the criteria of a particular lender.
Here are three of the main equipment appraisal methods:
Here are the basic steps of the equipment and machinery appraisal process:
There are a number of nuances in the types of used equipment appraisals that are possible. You’ll want to speak with an appraiser to find out which is applicable to your situation. Here’s a summary of the possibilities:
The sales comparison method of appraisal is based on analysing the selling prices of similar equipment or machinery. If it is possible to find close comparisons, this method has the advantage of being based on real-world transactions. But if it is difficult to find close comparisons, the experience and skill of the appraiser is required to make fair and reasonable adjustments.
The cost method of appraisal is based on the estimated replacement cost of the equipment or machinery. Sometimes this can be straightforward — imagine a vehicle from a mainstream manufacturer that can easily be found on a sales lot.
Other times, it can be quite complex — imagine a special-purpose vehicle that has been designed and assembled using a mix of aftermarket parts from various manufacturers along with custom-made fittings.
In either case, the appraiser will estimate what it would cost to replace the equipment and then depreciate that amount based on its age, condition, and other factors.
The income method of appraisal is based on estimating the net economic benefit of owning the equipment or machinery.
Imagine a machine that produces 100 widgets per day. What does it cost to power and maintain that machine? How much do those widgets sell for? If there is sufficient data to estimate the value that the equipment or machinery is expected to contribute to the business in the future, it may provide a basis to estimate its value today.
There are a number of situations where an equipment appraisal involves legal considerations around transparency and disclosure. Here are some examples:
Whether you are engaged in borrowing, litigation, contracts, insurance claims, or a bankruptcy proceeding, the accurate and unbiased valuation of equipment may be required to meet all of your legal obligations.
Litigation generally means resolving a dispute through a financial settlement. If that dispute involves physical assets, an independent appraisal may be helpful.
Imagine that ABC Manufacturing and XYZ Manufacturing wish to end their strategic partnership. They each operate their own factories, but they’ve run into a disagreement about how to divide the assets. One solution is to hire a professional appraiser who can provide expert testimony as to the value of the equipment in each factory so they can calculate a fair split.
Generally, the most contentious aspect of an insurance claim is agreeing on the amount of the payout. This is where a professional appraiser can help.
Imagine that a flood damages some equipment at Joe’s Auto Shop. Joe believes it will cost £50,000 to replace, but the insurance company only offers him £25,000. One option would be for Joe to sue the insurance company, but this could be a costly and lengthy process. Another option would be to call in a professional appraiser. If the appraiser agrees with Joe, it could provide a persuasive argument for the insurance company to increase their payout.
Some jurisdictions charge property taxes or other assessments based on the value of equipment and machinery. An independent appraisal could come in handy if you wish to dispute the amount of tax for which you are being assessed.
Bankruptcy court may require an expert appraisal for two reasons: to determine if there are assets that would be exempt from the claims of creditors, and to determine if the assets are of sufficient value to pay off the debts. The second point is crucial, because if the assets are determined to be of sufficient value, then it is likely that the bankruptcy petition will be denied and the petitioner will be required to repay the creditors.
Yes, an equipment appraisal is often part of how to value a company, because the value of a company’s assets can contribute a large part of the company’s overall value. If you are buying or selling a company, an independent appraisal of equipment and machinery may be part of the due diligence process.
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