The appraisal process will determine a fair value price for machinery. The appraisal can be used for replacement value, insurance, a bank loan or resale and is a secure way to ensure that the equipment owner as well as any potential buyer get a fair deal. There are different values placed on the same equipment based on what the appraisal is written for. It’s not a one price fits all scenario.
What is the purpose of the valuation?
The first step in valuing equipment is to understand the purpose of the valuation. This helps you figure out which value is appropriate to use. The three most common categories are:
1. Buying or selling equipment
When buying or selling used equipment, the most common valuations are:
· fair market value
· orderly liquidation value
· forced liquidation value
Which one to use depends on the circumstances of the purchase or sale. For example, a regular transaction between two willing parties usually relies on fair market value, while liquidation value may be involved in a bankruptcy.
Businesses often need to know equipment values during insurance claims or to ensure they have appropriate insurance coverage.
The most typical values in use for insurance purposes are:
· actual cash value
· replacement cost new
· reproduction cost new
Which one is used affects the premium and depends on the insurance policy.
3. Continued use
The “continued use” category applies to equipment you’re using in your business and have no intention of selling. You may need to know its value for financial reporting or to use the equipment as security for financing.
It’s typical to determine fair market value for such purposes, though some banks may collateralize equipment based on its forced liquidation value.
Once you determine which value is appropriate for your purposes, you’re ready to research how much the equipment is worth. Appraisers can use a combination of these three methods:
In the sales comparison method, an appraiser determines the equipment’s value by researching the market for similar new and used equipment and seeing what it has sold for. They may adjust for the equipment’s age, condition, remaining useful life and other factors.
Appraisers typically look at a variety of market data sources, such as manufacturers, dealers, auction houses and trade publications.
The cost method is typically more important if equipment doesn’t have an active market because it is unique or highly customized. You start by determining the equipment’s replacement cost new. This value is then depreciated based on the existing equipment’s age, condition, and other factors.
This method determines a value for equipment based on how much income it produces. It may be relied on more when the asset is clearly tied to a specific income stream.
Whatever the reason you need the appraisal for, you should look for an experienced appraiser to ensure that you are getting the right type of appraisal as well as the right value. If you need help valuating your machinery or need an appraisal of several pieces of equipment, Manufacturing Solutions is here to assist you. Give us a call at (714) 545-0940, we’re here to help.