Archive for Equipment Appraisal 101 Book

What is inside an Equipment Appraisal Report

What should be inside the Report

The Report – Our report is USPAP compliant and an average appraisal will have the following included sections:

  • Summary Of Facts
  • Scope of Work
  • Degree To Which The Property Is Inspected Or Identified
  • Extent Of Research Into The Physical Or Economic Factors That Could Affect The Property
  • Extent Of Data Research
  • Type And Extent Of Analysis Applied In Arriving At Opinions Or Conclusions
  • Depth Of On-site Inspection
  • Overall Condition Of Equipment
  • Intended Use
  • Economic Conditions
  • Definitions Of Conditions
  • Methods Of Evaluations
  • Sources Contacted
  • Market Conditions
  • Final Value Summary And Reconciliation
  • Appraiser’s Certifications And Qualifications
  • Photographs

Note: Our report is formatted in a bound presentation binder, with a digital PDF of the entire appraisal inside – We supply 2 copies.

Tip: Keep the appraisals digital copy off site in a fire safe for validation later in case of an emergency, insurance claim, or another appraisal.

Equipment Appraisal Arbitration

Equipment Appraisal Arbitration – Save Money & Frustration

Arbitration, a form of alternative dispute resolution (ADR), is a legal technique for the resolution of disputes outside the courts, where the parties to a dispute refer it to one or more persons (the “arbitrators”, “arbiters” or “arbitral tribunal”), by whose decision (the “award”) they agree to be bound. It is a settlement technique in which a third party reviews the case and imposes a decision that is legally binding for both sides.

Solid Reasons and Ideas on hiring a Certified Appraiser as an Arbitrator:

1.  Have the equipment appraiser give the High value (Fair Market in Continued Use), the Mid value (Fair Market or Orderly Liquidation), and the low value (Forced Liquidation). And negotiate based on those numbers.

2.  By using one unbiased independent appraiser you will save at least one appraisal fee and massive legal fees on both sides.

3. There will be no favorites – Both parties should be present and both parties should realize being helpful to this one appraiser will be best for their cause.

4. This keeps the appraiser from having any chance of being thrown out due to potential advocacy.

5. Split the Fee

Note: The hardest part of this scenario is coming to an agreement on who this appraiser should be. Use the guide and remember the general guidelines about using an appraiser from outside the area. You may have to pay travel fees but you can almost guarantee that appraiser is independently unbiased. 

How long does an Equipment Appraisal Take

How long does an Equipment Appraisal Take?

Or Answer: What Appraisers Do Next / Time Expectations

Again this part varies by Appraisal Company but let’s take a dive into our company process as an example:

  1. Compiling the data – Once we have all of the data either through a site visit or from our form being submitted we compile all of the data into a usable format.
  2. Research – Next we start the research. Every piece on our appraised list will have all three types of research considered, those types being. Market Data Approach, Cost Approach, and Income Approach. We will use the best approach that fits the item and transfer that data into our report. Without giving away to many industry secrets we compile our data from external sources like the internet and dealers and brokers of equipment, and from internal data from our database of millions of pieces of equipment

Time Involved: This is difficult to gauge due to the nature of different equipment. But on average we will have 1 hour of time per appraised item. I have seen many appraisal companies take up to 3 weeks to deliver a report. With the size of our team though we generally are able to deliver our reports in under 10 business days – many times within 2 – 5 business days.  As soon as our appraisals are completed and paid for we send them digitally and send the hard copies via express mail.

Equipment Appraisal Site Visit

Step 9 – The Equipment Appraisal Site Visit

You have now engaged the appraiser and they are on their way to do a site visit. What do you do now?

Don’t Panic! It will be ok; at this point you have done everything to make sure the visit goes as smoothly as possible.

Have a Plan:

  1. Know who is going to be escorting the appraiser through the location. Make sure the person has all of the knowledge about the equipment the appraiser may need such as history, maintenance, & costs.
  2. Have a copy of your asset list for yourself, don’t rely on the appraiser to bring you a copy, have it all yourself and ready to go.
  3. Have a route picked out, try to have a flow to the walkthrough that either matches your asset list or is the most time efficient. Don’t forget to schedule for a break – this is hard mental work on both you and your appraiser.
  4. If the machinery isn’t running (best due to safety) it’s perfectly fine if you choose to describe what you are using the machinery for. As a matter of fact this helps the appraiser determine that’s its being used in its highest and best use.
  5. Speak Clearly and Loudly– You don’t want to appraiser getting the wrong information (remember we are half deaf too).
  6. Describe every piece you have: We actually make the escort do this – this eliminates mistakes by making sure the appraiser is fully aware of the options and history and sometimes even industry jargon.
  7. Make sure the appraiser has contact information for you in case there are questions later.
  8. Do the Appraisal After or Before Work Hours – This helps a few things:
  • First is safety – the machinery appraiser will be climbing in and around the machines to look for data.
  • Second is no distraction – whoever is escorting the appraiser around the shop needs no distractions / phone calls / emergencies / etc. This allows a better flow of information and these problems can ultimately cost you time and frustrate your appraiser.
  • Third is Employee Curiosity – Every employee wants to know what’s happening. And trust us we have heard horror stories about the water cooler talk “Are we going out of business? Should I update my resume? Are we selling? Is the owner leaving? Is the owner DEAD?” We have heard them all and have been asked them all during business hours.
  • Fourth is Sound Level – If we can hear what you are saying we can record the data better and therefore have a better basis for our research.
  • Last is Pictures – No Employees having to move or run out of the picture. Save yourself productivity and interrupted workflow.

You are now done with the part of the Machinery Appraisal you can control. Time to leave it in the hands of the appraiser you have made an informed decision on hiring. 

Preparing for the Equipment Appraisal

Step 8 – Preparing for the equipment Appraisal / Information:

Note: This is your option – Obviously dirty rough looking machinery will bring a potentially lower value. We just wanted you to have all of the info in case you ever wanted to get an appraisal that needs higher values. And a good equipment appraiser will see past it anyways.

Note: Here are also some ways to improve value in case you need to sell the equipment.

Now that you see how important an asset list in the process let’s move to the machinery / information. It makes sense that the better your equipment looks the more it seems to be worth. Why is this? Simple…better looking equipment equals a higher perceived level of maintenance. Let’s look at some basic tips to make sure your equipment receives the highest appraisal value it deserves.

Dupont overhaul – Yes a simple paint job can drastically impact your appraisal result. This is true for 2 reasons (1.) The appraiser knows that a better looking piece of equipment has a higher auction value and can therefore justify giving better forced liquidation values. (2.) Appraisers are not mechanics or technicians – the appraiser has to rely many times on what they see as well as what they hear. If you say “I just rebuilt this machine” and it looks like a rusted piece of junk you will have a harder time convincing that appraiser.

Clean the work area – A cluttered mess of tooling and paperwork makes the appraiser have a harder time justifying ancillary and support items later when they are unable to review the picture and easily see the support tooling. Oftentimes this picture is the only thing to trigger an appraiser’s memory about what they saw, or to help their researchers establish what to research. While you are at it replace a few light bulbs, I can’t tell you how many times my pictures have turned out poor due to a “cave like” lighting scheme.

Have maintenance records available – A simple fix to this problem is have a plastic see through document holder attached to the machine with the maintenance schedule written in and signed off by the maintenance personnel. Or have a good maintenance schedule documented and a copy ready for the appraiser. This instantly tells me I am dealing with a company who maintains their equipment.

Check the Tires – Remember the old rule of thumb that says you can tell how well a person is doing by their shoes. Guess what – an appraiser can tell how well you are doing by your tires. This is a secret industry gauge as to your maintenance therefore a sanity check on what your maintenance schedules may be like. If you’re risking a breakdown and expenses due to tires…what must your machinery maintenance schedules look like? If you don’t have time to do the maintenance – how will you possibly have time for a machine to break down?

Prepare for an Equipment Appraisal

How do I Prepare for an Equipment Appraisal?

Our Answer: Preparing the Asset List

The first part of any machinery appraisal is making sure your asset / machinery list is up to date and as complete as possible. Many times we see this list several years outdated and with vague references to the equipment, this often leads appraisers to charge more as they find equipment while on site or worse to inflate the price going in because they know the asset list is poor and they are hedging their bets.  Both of these scenarios will cost you more $’s than needed.

Let’s start by looking at what the perfect asset list should look like.  There are some key elements to a perfect asset list that if followed could easily save your business thousands of dollars on a machinery appraisal (at least when dealing with us…). Here are the components of a perfect asset list:

(see the Equipment Data Sheet Form – request a free one at Appraisals@expertequipmentappraisal.com)

  • General Item / Property Name – Example: Bulldozer, Computer, Address of Property, General Description of Improvement, Etc.
  • Location of Item or Property
  • Make of Item – Caterpillar, Dell, Etc.
  • Model of Item – Example: D-11, Inspirion M17, Etc.
  • Year of Item – Year Manufactured if Machinery not purchased
  • Serial Number
  • Year of Purchase
  • Cost to Purchase
  • Current Depreciation Amount
  • Item Tag Number
  • General Specifications of the Machine – I.E. Size, Weight, Specifications, Options

Note: A digital picture with the item tag number should also be on file for every piece of equipment. And some items on the list will not touch every category like Commercial Property, Land Improvements, Etc.

This should be compiled on an excel spreadsheet for easy transfer between your accountant, your banker, your insurance agent, and of course your friendly neighborhood machinery appraiser.

By having a solid up-to-date list like the one described you are able to speed up a machinery appraiser in the on-site visit / data collection phase and also help set some sanity check values for the appraiser. A good example of the sanity check is when appraiser is unsure of a machines options and year – a more conservative value may oftentimes be applied thus possibly lowering your overall appraisal value by thousands of dollars.

This is also a good time to talk about the difference between an appraisal that is prepared where the appraiser comes on-site or where they do the appraisal off-site. There are a myriad of names for these types of appraisals but the basic difference is on-site vs. off-site.

On-Site (Summary Appraisal) – This is when the machinery appraiser will actually come to the location and collect the data / establish age and condition / etc. This is usually a more expensive appraisal due to travel costs and time spent collecting data (nearly double in our pricing) and is oftentimes required by banks and suggested by attorneys. This is often also the default for court / when a poor asset list is in place – poor records equal greater risk by a banker and less trust at the time of appraisal.

Off-Site (Desktop Appraisal) – This is when the machinery appraiser uses data / pictures / descriptions provided by the business to do the appraisal. The appraiser must still research the prices but the time / travel of data collection is removed equaling lower costs.

What does an Equipment Appraisal Cost

What does an Equipment Appraisal Cost?

Our Answer: Step 6 – Negotiating the Appraisal Fee / How much to pay:

Fees come in all shapes and sizes with appraisers. Most Certified Appraisers can give you a free quote when you supply them with a solid asset list or depreciation schedule. We cannot speak for everyone but here are some of the fee structures we have encountered and used. Remember in a litigation situation you will almost always need a site visit for solid court defense.

1. Hourly – Definitely the most expensive – Gets your ducks in a row before you hire this way and try to negotiate a flat fee instead. Hourly costs range just like an attorney – we have seen $50 to $150 (ours) to $250 and up. When we are in a setting with no information we generally try to gauge based on a half day rate of $600 and that seems pretty average. So for instance I need to visit your shop (1/2 day), Research your Equipment (full day), write the report (1/2 day) – You would have a $2400 appraisal.  Based on the National average we have seen appraisals run about $2900 – $3500 with lows in the $600 range and highs in the Hundreds of Thousands.

2. By the Item – Most Times Appraisers will quote or at least consider how many items they specifically have to research and report on. Some different government agencies can be used for a guide here. The IRS hints at (but never outright says) equipment valued at $2500 and up should have its own line item in the appraisal. The SBA mentions $5000 and up. I have seen this be very dependent on how much equipment the company has and the type of equipment. Items below this amount fall into support, furniture, or electronics and are generally appraised in bulk with industry depreciation metrics. We have seen the per item cost range from $35 to $250 a good national average may be $75 – $100 in the Midwest and $95 to $125 on the coasts.

Flat Rate – The appraiser takes everything into consideration and quotes a flat rate fee. This is a good way to hire if you have given a good asset list to the appraiser.

Note: Remember that preparation for court, depositions, and actual court time are generally billed separately. Yes you can simply subpoena your appraiser and not pay him – but remember you want this guy as an expert witness on your side and the small fees will reap HUGE rewards.

Note: An Appraisal must be paid for BEFORE or AT the time of delivery to be considered unbiased. This eliminates the other side from saying you held any sway over the appraisers values by withholding money.

Things that impact the fee are:

Preparation by You – Spending a few hours using tips from this book can make a massive cost savings difference on your appraisal.

Locations(s) – Where in the world is the equipment and will the appraiser need to do a site visit(s), buy plane tickets, etc.

Type of Equipment – It is harder to appraise custom machinery or industry unique machinery than it is to appraise a truck there are thousands of for sale at this moment.

Type of Appraisal – On-site vs. off-site appraisals affect the cost greatly.

Use of Appraisal – An appraisal that is going to be used in the courtroom has a higher price than one going to be used for accounting purposes.

Appraiser Pedigree – Interestingly enough although appraisers with lots of credentials look good on paper. Sometimes that only means they are more expensive and not more qualified. This is a tough one to gauge for the average business owner.  Choose wisely!

Let us give you some basic tips to keep your costs down.

Fee Tip 1. Have that perfect asset list ready (see the section) and make sure the appraiser knows about it, and is willing to discount because of it. Also request the appraisal company you feel comfortable with.

Fee Tip 2. Hire an appraiser that has national reach. We have strategic alliances with appraisers across the nation that will do our site visits and therefore lower your costs by eliminating travel fees.

Fee Tip 3. Know if you can use a desktop appraisal or need a summary appraisal. As we mentioned earlier this can save thousands in cost. And generally there the only real difference is if the appraiser physically sees the equipment.  Remember that Litigation or a Bad Asset list tends to push the need for an on-site visit.

Fee Tip 4. Don’t be fooled by fancy titles. Make sure to ask the questions mentioned in the previous section. And yes we do have those same fancy titles but frankly we don’t take ourselves that serious – we were raised blue collar and have worked around machinery all of our lives.

Fee Tip 5. It is very important to remember that for a report to be in compliance you will have to pay for it BEFORE or at the time of delivery. The appraiser usually will ask for half up front and half at time of delivery – This is Normal.

Fee Tip 6. Be sure when you sign the engagement agreement you note what extra charges may be if more equipment is found while on-site. We have seen instances where they gouge you for double their normal rate. 

Fee Tip 9. Line Item Count: Not all items on your Asset list need to be appraised individually – This is a personal decision in many respects. Certain Government agencies dictate everything $2500.00 and above needs to be a separate line item on the appraisal, the SBA (Small Business Administration) recently dictated $5000.00 as the minimum bottom threshold. When in doubt about the appraisal threshold, please default to $2500.00 or a lower amount. As for small items, furniture, and electronics, you can enter all of these separately or as a batch dollar amount and we will apply industry depreciation metrics to them at a very minimal cost.

Fee Tip 8. Shameless Advertisement Here – We have decided that a Flat Rate based on Items, Hours, and Travel has worked the best for us and our customers – NO SURPRISES THAT WAY.

Equipment Appraisal Value Levels for a Business Owner

What is the Proper Equipment Appraisal Value Levels for a Business Owner?

Step 3 – Appropriate Value Levels for the Business Owner:

As you can see there are a few values that would apply. Here is some insight on this.

  • Getting a Loan? – Use Fair Market Value in Continued Use as this is the highest value generally accepted. A lot of times lenders will take whatever number you provide and beat it up – I have seen some even have a set number like 80% all the way down to 40%.  We suggest in this scenario to find out that number ahead of time if you can and if able go ahead and have the appraiser give you Fair Market Value in Continued Use, Orderly Liquidation, and Forced Liquidation on the same report. They should have all of those number anyways.

Here is a Case Study on the importance of the right Value

A company (unnamed to protect their dignity) hired an “appraiser” (auctioneer) to value their equipment. The company had nearly 2 million dollars worth of equipment at new cost and the equipment was between 10 and 5 years old. The auctioneer valued the equipment without asking or even realizing what the purpose of the valuation was and gave the company a report showing his values (Auction Value or Forced Liquidation Value).  Here is where the problem happens. The bank received the appraisal directly to use as loan collateral validation for a refinance and upon seeing the value decided to play it safe and cut that number in half – not knowing that the auctioneer had already given the bottom dollar. Red flags go off about loan covenants and the loan committee decides to not approve the loan. Appraisal dollars wasted, initial loan fees wasted, relationship with the bank ruined.

 

  • Buy / Sell Scenario – This is a tough one – Generally we see the average value come in somewhere around Orderly Liquidation. The problem is in many Buy / Sell scenarios the numbers shift based on where the taxes are going to be paid. This is a very important thing to consider because it can influence how many dollars finally land in your pocket when you sell – Please consult a Business Broker Here.
  • Closing the Doors – This is where you start with orderly liquidation and finally end up with forced liquidation or even scrap. In today’s market many times the machinery costs more to remove than it’s worth and scrap is really the only option. One thing you may consider here as well is a 1 Check liquidation – this is where a company comes in and buys you out for a fraction of the value. We would still suggest an appraisal here to at least know what you are giving up.
  • Finally, sometimes the Fair Market Value – Removed is used when there is a significant cost to remove the items(I have seen this used effectively many times when the other side is screaming for Fair Market Value)

Choose an Equipment Appraisal Value Level

How do I Choose an Equipment Appraisal Value Level?

Our Answer: Step 2 – What Value Level do I place on the equipment?

Obviously you want the equipment to be valued at the best number for your situation – right? Well then it’s important to understand the different types of value that are recognized so you can choose the correct value.

The following values are defined in the publication Valuing Machinery and Equipment: The Fundamentals of Appraising Machinery & Technical Assets, Second Edition, by the American Society of Appraisers.

  1. Fair Market Value is the estimated amount, expressed in terms of money, that may reasonably be expected for a property in an exchange between a willing buyer and a willing seller, with equity to both, neither under any compulsion to buy or sell, and both fully aware of all relevant facts, as of a specific date.
  2. Fair Market Value – Removal is the estimated amount, expressed in terms of money, that may reasonably be expected for an item of property in an exchange between a willing buyer and a willing seller, with equity to both, neither under any compulsion to buy or sell and both fully aware of all relevant facts, considering removal of the property to another location, as of a specific date.
  3. Fair Market value in Continued Use is the estimated amount, expressed in terms of money, that may reasonably be expected for a property in an exchange between a willing buyer and a willing seller, with equity to both, neither under any compulsion to buy or sell, and both fully aware of all relevant facts, including installation, as of a specific date and assuming that the business earnings support the value reported. This amount includes all normal direct and indirect costs, such as installation and other assemblage costs to make the property fully operational.
  4. Fair Market Value – Installed is the estimated amount, expressed in terms of money, that may reasonably be expected for an installed property in an exchange between a willing buyer and a willing seller, with equity to both, neither under any compulsion to buy or sell, and both fully aware of all relevant facts, including installation, as of a specific date. This amount includes all normal direct and indirect costs, such as installation and other assemblage costs, necessary to make the property fully operational.
  5. Orderly Liquidation Value is the estimated gross amount, expressed in terms of money, that could be typically realized from a liquidation sale, given a reasonable period of time to find a purchaser (or purchasers), with the seller being compelled to sell on an as-is, where-is basis, as of a specific date.
  6. Forced Liquidation Value is the estimated gross amount, expressed in terms of money, that could typically be realized from a properly advertised and conducted public auction, with the seller being compelled to sell with a sense of immediacy on an “as is,” “where is” basis, as of a specific date.
  7. Liquidation Value in Place is the estimated gross amount, expressed in terms of money, that could typically be realized from a failed facility, assuming that the entire facility would be sold intact with a limited time to complete the sale, as of a specific date.
  8. Salvage Value is the estimated amount, expressed in terms of money, that may be expected for the whole property or a component of the whole property that is retired from service for possible use elsewhere, as of a specific date.
  9. Scrap Value is the estimated amount, expressed in terms of money, that could be realized for the property if it were sold for its material content, not for a productive use, as of a specific date.
  10. Insurance Cost New is the replacement or reproduction cost new as defined in the insurance policy less the cost new of the items specifically excluded in the policy, as of a specific date.
  11.  Insurable Value Depreciated is the insurance replacement or reproduction cost new less accrued depreciation considered for insurance purposes, as defined in the insurance policy or other agreements, as of a specific date.

Overview of Equipment Appraisal Reasons

Step 1 – Brief Reasons Overview

  • Business owners need an appraisal for insurable value, selling, financing, expansion, and strategic growth.
  • CPA’s need a certified appraisal because the IRS requires a certified appraisal by a Certified Appraiser! A certified appraisal is also needed when helping their clients convert from a C to S Corporation, Estate and Gift Planning, Trusts, Sarbanes-Oxley, and FASB 141/142.
  • Bankers and lenders need an appraisal in support of loan and lease decisions to substantiate and collateralize a loan. Especially the Small Business Administration’s new SOP’s that require a “qualified” equipment appraisal.
  • Attorneys need an appraisal to substantiate accurate and realistic values that withstand IRS and court scrutiny.

The Most common reasons you might need a certified appraisal

  • Buy / Sell Agreements
  • Converting From C To S-Corp
  • Loans / Financing
  • Leases
  • Insurable Value
  • Tax Purposes
  • Foreclosures
  • Estate Planning
  • Bankruptcy / Insolvency
  • Divorce Settlements
  • Mergers & Acquisitions
  • Litigation Support
  • Trust Planning
  • Sarbanes Oxley
  • Partnership Dissolution
  • Gift Estate Planning
  • 1031 Exchanges
  • Retirement Planning
  • FASB 141 & 142 / GASB 34