When it comes to business and industry, it is essential to have the real value of machinery and equipment. An expert appraisal will give clarity and assurance whether you are selling, insuring or financing assets. The guide discusses the basics of machine and equipment valuations and its relevance, procedures and when you may require it.
What is Machinery and Equipment Appraisal?
The machinery and equipment appraisal is an official process used to ascertain the fair market value, replacement cost or liquidation value of the tangible assets.
These assets may be as small as a simple tool, or very large industrial machines operating in industries such as:
- Construction
- Agriculture
- Manufacturing
- Mining
- Transportation
- Forestry
- Energy and utilities.
Standardized methodologies are applied by professional appraisers to evaluate the condition of an asset, the age of an asset, its usage and market demand.
What is the importance of Appraisals?
Businesses and individuals can have a need to have machinery and equipment appraisals because of a number of reasons:
Financing and Loans
Before a business loan or line of credit is approved by banks and lenders, they usually demand the value of equipment to be used as security.
Buying or Selling Equipment
Proper valuation is beneficial in enabling the buyer and sellers to make sound decisions and price fairly.
Insurance Purposes
Appraisals assist in insurance companies to find out the replacement values and to cover assets appropriately in the event of loss, damage, or theft.
Mergers and Acquisitions
During merger or acquisition of companies, the machinery appraisal is employed to value assets so that it can be reported and negotiated fairly.
Tax and Accounting Compliance
The capital cost allowance (CCA) calculations, asset write-down or audit requirements under the Canadian tax laws may need appraisals.
Litigation or Disputes
A certified appraisal might also be necessary as a court document, particularly in legal situations, like divorce, partnership disputes or bankruptcy proceedings.
Types of Value in Equipment Appraisals
Value has to be defined differently depending on the situation.
Some of the most used ones are:
Fair Market Value
The price at which the asset would if it changed hands between a willing buyer and seller in an open market.
Orderly Liquidation Value
The approximate price of the assets to be sold in a fair period in organized sales (but not forced selling).
Forced Liquidation Value
The price equipment would be probably higher in a quick sale, like an auction or sale in bankruptcy.
New Replacement Cost
The expenses of replacing the equipment with a new machine with the same capacity and functionality, installation and taxes.
Depreciated Value
This takes into consideration the original cost of purchase less the depreciation in terms of usage, condition and economic life.
Common Industries Requiring Appraisals
Construction
The high-value assets such as heavy equipment like excavators, bulldozers, cranes, and loaders require frequent appraisal to lease or sell.
Agriculture
Agricultural businesses and farmers insure and finance tractors, sprays, harvests and dairy equipment.
Manufacturing
Asset tracking and appraisal is frequently needed to track the machinery like CNC machines, conveyor systems, welding equipment, and robotics, which are used to pay the taxes.
Mining and Forestry
Sometimes, large-scale equipment that is used in resource extraction such as drills, trucks and logging machinery is supposed to be appraised to comply with industry and safety regulations.
How the Appraisal Process Works
Inspection
The appraiser gives a detailed on-site or virtual visit and records:
- Make, model, and serial number
- Age and condition
- Maintenance history
- Operating hours
- Modifications or upgrades.
Market Research
Your appraiser uses your equipment and comparisons it with other assets of the same kind on the market today to make a value based on historical records, resale sites and manufacturer data.
Report Delivery
A written appraisal report is provided and it includes:
- Detailed asset list
- Condition reports
- Photos
- Value conclusions
- Methodology used.
The document may be utilized in a court case, money, or insurance.
Methods of Valuation
Three methods are frequently applied to the valuation of machinery and equipment:
Cost Approach
Estimates the cost of replacing the equipment with a new asset or similar to the one that exists but excludes depreciation.
Sales Comparison Approach
Will use recent sales prices of similar equipment in the Canadian or North American market to estimate its value.
Income Approach
Is primarily applied to revenue earning equipment. It uses a calculation on value in terms of revenue that the equipment is likely to produce throughout its available life.
Choosing the Right Appraiser
In choosing an appraiser, you should make sure that he or she is:
- Certified and independent: Do not use appraisers who will have a conflict of interest.
- Knowledge in your field: An appraiser of mining equipment might not be knowledgeable of the high-tech medical equipment.
- Inline with the regulation: This is particularly in case the appraisal will be utilized in taxation or legal matters.
Costs of Machinery and Equipment Appraisals
The price of an appraisal will depend on:
- Quantity and a complexity of items
- Travel and inspection time
- Level of certification required.
When Should You Get an Appraisal?
You had better have your machinery appraised:
- Prior to applying to get financing.
- Prior to listing or buying equipment.
- Following significant upgrades or overhaids.
- On a yearly basis of insurance.
- Upon business change (e.g. succession, merger, or sale).