Equipment appraisals: All you need to know

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    Michael David

    Page written by Michael David. Last reviewed on July 19, 2024. Next review due October 1, 2025.

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    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.

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      What is a machinery & equipment appraisal?

      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.

      Why would you need an equipment appraisal?

      There are many reasons why you might need an objective appraisal of the value of your equipment, including:

      • Financing. Banks, private lenders, and even the SBA (U.S. Small Business Administration) may require an appraisal before accepting your equipment or machinery as collateral for a secured business loan.
      • Insurance. Either you or your insurance company may desire an equipment appraisal to determine its replacement value.
      • Equipment sale. If you are buying or selling a piece of equipment, an independent equipment appraisal can help set an appropriate price.
      • Business merger or sale. If you are buying a business, an equipment appraisal can help determine the value of the physical assets of the business. 
      • Divorce. In a divorce negotiation, an equipment appraisal may be needed to determine the fair value of marital assets.
      • Litigation. If you are involved in litigation that concerns equipment or machinery, an independent appraisal may be needed to calculate their value. 
      • Estates. Whether you are creating an estate plan, or settling the estate of someone who is deceased, an equipment appraisal may be necessary to determine the value of the estate’s assets.
      • Bankruptcy. When bankruptcy proceedings are taking place, it is necessary to quantify every asset and liability, which may require an equipment appraisal.

      Types of cash flow loans for small businesses

      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, and factors such as IRS requirements, industry standards such as GAAP or International Valuation Standard (IVS) guidelines, or the criteria of a particular lender, such as the SBA.

      Here are three of the main equipment appraisal methods:

      1. Market value method. One way to determine the value of equipment is to look at data from manufacturers, dealers, auction houses, trade publications, and other sources to see how much comparable equipment has sold for. From there, the appraiser can adjust the value of your equipment based on factors like its age, condition, and remaining useful life.
      2. Cost method. Market data can be scarce, especially when the equipment is rare or highly customized. With the cost method, the appraiser will instead try to determine how much it would cost to replace the equipment — including any special parts or labor involved — and then depreciate that amount based on factors like its age and condition.
      3. Income method. Sometimes a piece of equipment can be appraised based on the present value of its future economic benefits. For this method to work, there must be established data on the income and expenses involved in owing and operating the equipment.

      Appraisal process

      Here are the basic steps of the equipment and machinery appraisal process:

      • Data gathering. The appraiser will start by gathering data about the property — information like its make, model, age, condition, cost, current use, and location.
      • Inspection. If required, the appraiser may wish to inspect your equipment to verify details such as its age and condition.
      • Research. Next, the appraiser will conduct research relevant to appraisal, such as recent sales transactions for comparable equipment.
      • Report. After careful analysis, the appraiser will provide a written appraisal that may state an estimated value or a range of estimated values.

      Types of used equipment appraisals

      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:

      • Fair market value. This is the cost at which the equipment would change hands between a voluntary buyer and seller, and may include the cost of moving and/or installing the equipment.
      • Replacement cost. This is the cost of replacing the equipment with something identical or as close as possible. 
      • Insurance replacement cost. This is the cost as defined by the terms of an insurance policy, which may or may not account for depreciation. 
      • Reproduction cost. This is the cost to make a new replica from the same or similar materials.
      • Liquidation value. This is the cost at which the equipment would change hands if the business failed and there was a time-limited liquidation sale.
      • Salvage value. This is the value that would be realized if the whole business property were to be shutdown.
      • Scrap value. This is the value that would be received if the equipment was no longer functional and only worth its raw materials.

      1. Sales comparison method

      The sales comparison method of appraisal is based on analyzing 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.

      2. Cost method

      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.

      3. Income method

      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.

      Legal considerations of equipment appraisals

      There are a number of situations where an equipment appraisal involves legal considerations around transparency and disclosure. Here are some examples:

      • When pledging collateral to a lender in order to finance your business, the independent opinion of an appraiser may be required to verify the value of your equipment or machinery.
      • In a business contract, such as the sale of equipment or of an entire business, an equipment appraisal may be needed to ensure that the terms of the deal are fair and accurate.
      • In the event of an insurance claim, either you or the insurance company may desire an equipment appraisal to determine the fair value of the loss.
      • In a bankruptcy proceeding, an equipment appraiser may be called upon to provide a valuation of the equipment that is being offered to secure creditors.

      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

      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.

      Insurance claims

      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.

      Tax

      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

      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.

      Can an equipment appraisal affect a business valuation?

      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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      Written by

      Michael David

      Michael David is a financial writer and former investment advisor. Writing for Capital Group, Dimensional Fund Advisors, Franklin Templeton Investments, HSBC, Invesco, PIMCO, Vanguard, global insurance companies, major banks and others, he has educated professionals, business owners and consumers about strategies for investing, insurance, banking and corporate finance for more than 20 years.

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