How to Order an Accurate Plastics Machinery & Equipment Appraisal

There are several options for machinery and equipment appraisals.  It is a good idea to know a little bit about what is involved in an appraisal before you request a quote from an appraiser.  A good appraiser should be able to answer any questions you have and easily walk you through the process.  Following are some explanations and definitions to you assist you in your appraisal requests. Scope of Work One of the first things you want to establish is the purpose of the appraisal.  There are many reasons to order an appraisal; some of the more common reasons are asset based lending, liquidation, transfer of assets between divisions, acquisition of equipment, tax liability, and insurance.  You also want to know who the appraisal is for as that will be stated on the report.  You may want it for your own company, for a bank or for another interested party (in the case of merger or sale). Onsite Inspection A cost effective way to see if you need to have an onsite inspection is to order an appraisal that is sometimes known as a “desktop appraisal”.   In this type of appraisal you supply the appraiser with information of what is to be appraised as well as photos and any other documentation you may have.  Usually this type of appraisal is done to establish if an onsite appraisal is required.  If the values from the desktop are not in line with your assumptions, you can request an appraisal with an inspection. Uniform Standards of Professional Appraisal Practice (USPAP) do not require that there be an onsite inspection, but onsite inspections can be more accurate.  Most lending institutions will require an onsite inspection as a way to make sure the equipment is still in place and operational. Value Definitions The value definitions are varied and can be changed for each specific assignment. One of the main influencing factors in value is time.  The length of time you have to liquidate your equipment is large factor in value.  Forced Liquidation Value usually offers the lowest value because of the short amount of time to liquidate the equipment.  Fair market usually offers a higher value because neither the buyer nor seller are under duress or time constraints.   If you have unique equipment or equipment with a very limited audience you may see a large difference between a forced liquidation and a fair market value. Forced Liquidation Value (Auction), Orderly Liquidation Value, Market Value (Fair Market Value), Market Value In Place and New Replacement Cost Value are typical value definitions. The following link has typical Appraisal Value Definitions supplied by the Association of Machinery & Equipment Appraisers (AMEA).   Typical Appaisal Definitions Approaches to Value There are three generally accepted approaches to value; market approach, cost approach, income approach.  The scope of work and type of equipment will determine which approach is the best for your appraisal, but you should be aware of them.

The Market Approach involves the collection of market data pertaining to the subject assets being appraised. This approach is also known as the ‘Comparison Sales Approach’. The primary intent of the market approach is to determine the desirability of the assets and recent sales or offerings of similar assets currently on the market in order to arrive at an indication of the most probable selling price for the assets being appraised. If the comparable sales are not exactly similar to the asset being appraised, adjustments must be made to bring them as closely in line as possible with the subject property.

The Cost Approach is based on the proposition that the informed purchaser would pay no more for a property than the cost of producing a substitute property with the same utility as the subject property. It considers that the maximum value of a property to a knowledgeable buyer would be the amount currently required to construct or purchase a new asset of equal utility. When subject asset is not new, the current cost must be adjusted for all forms of depreciation as of the effective date of the appraisal.

The Income Approach considers value in relation to the present worth of future benefits derived from ownership and is usually measured through the capitalization of a specific level of income. This approach is the least common approach used in the valuation of machinery and equipment since it is difficult to isolate income attributable to such assets.

Report Time Frame  How long you give the appraiser to complete the report can have financial implications.  The more time you have for the appraiser to complete the project the more thorough of a job can be completed.  Flights and other expenses booked weeks in advance as opposed to the next day can have a substantial effect on the cost of the expenses. Internal Documentation  How much information do you have on your equipment?  How much can be supplied easily to the appraiser?  You know your equipment and the subtleties better than anyone walking into your plant could.  Providing documentation for purchase prices, options, upgrades, maintenance schedules, etc. will help the appraiser complete the report with all of the relevant facts.  Many upgrades or options cannot be seen from the visual inspection.  The more information you can provide the appraiser the better he or she will be able to give an accurate value. Engagement Letter You should receive an engagement letter from the appraiser prior to starting the project.  Read this document carefully.  If you order a report with Market Value but your bank requires Forced Liquidation, you will be charged more to redo the report. The engagement letter is your contract with the appraiser and should be looked at as such. Opinion of Value  It is important that anyone ordering an appraisal understand that it is the opinion of value of the appraiser at the time of the report.  It is not a guarantee of value.  One way to ensure that you will have an accurate appraisal is to look for an appraiser with experience with your specific equipment.  Used equipment dealers that offer appraisals buy and sell your type of equipment every day. They will have an intimate knowledge of your industry and what trends are currently affecting values.

If you would like to discuss getting an appraisal on one piece of equipment or an entire plant, please contact David Pietig at 224-875-3716.   David is an AMEA Accredited Appraiser and has 20 years of plastics machinery experience at Arlington Plastics Machinery.