Personal Property Appraisals 101

What You Should Know Before Hiring a Property Appraiser

Are you a lender who needs an appraisal of personal property (machinery, equipment, and inventory) in connection with making a loan? Are you a company that needs an appraisal in connection with a capital raise or some other purpose?

Regardless of the reason, there are some baseline concepts that you should understand before hiring an appraisal firm.

Three Key Property Appraisal Definitions: FL vs OL vs FMV

As a threshold matter, you need to understand these three key definitions, as defined by the American Society of Appraisers (ASA):

Forced Liquidation Value (FLV)

• An opinion of the gross amount in monetary terms, that typically could be realized from a properly advertised and conducted public auction.
• The seller is usually compelled to sell with a sense of immediacy on an as-is, where-is basis, as of a specific date (usually a 4-6 week time frame).

Orderly Liquidation Value (OLV)

• An opinion of the gross amount in monetary terms that typically could be realized from a liquidation sale, given a reasonable period of time to find a purchaser(s).
• The seller is usually compelled to sell on an as-is, where-is basis, as of a specific date (usually a 3-6 month time frame).

Fair Market Value (FMV)

• An opinion of the price at which the property would change hands between a willing buyer and a willing seller.
• Neither buyer nor seller is under any compulsion to buy or to sell.
• Both buyer and seller have reasonable knowledge of relevant facts, as of a specific date (usually unlimited time frame).

FLV and OLV appraisal reports are generally used in asset-based lending or for an auction or liquidation.

FMV appraisals are generally used for continued use/to allocate purchase price or when a company is being sold as an ongoing concern.

Basic Appraisal Pricing

In determining the price of a personal property appraisal, most appraisal firms use a daily rate of approximately $1,200 to $1,500 (plus travel-related expenses if required).

That daily rate takes into account the time required to:

• Perform a walk-through inspection (if needed).
• Photograph relevant assets.
• Meet with management.
• Conduct reliable research and write the report.

Each property appraisal is typically performed by one individual. Depending on timing (or if numerous locations need to be examined), additional appraisers or support staff could be used. Of course, that would also mean an increased cost.

Machinery & Equipment Appraisals

A qualified appraiser can usually inspect about 20 CNC machines, plus support equipment/tooling, warehouse, and office equipment. In determining the cost to perform an appraisal, consider the following estimates:

• 1 day is commonly required to walk through and review one facility.
• Approximately 20 machines can be researched per day. However, if the machines are more complex or specialized, it could take approximately 2-4 days ‘per 1 day of inspection’ to complete.
• 1 day is typically needed to write, review, and complete the report.

Let us use a $1,300 per day rate for an appraisal that has 20 CNC or similar machines. It would require:

• 1 inspection day
• 2 days researching values
• 1 day writing the report

This could amount to a cost of $5,200, or slightly higher if we also include travel expenses.

Should there be 100 CNC machines but within that group, there are 20 ‘similar’ or like machines, it still could result in a cost of $5,200 for the appraisal.

If all are dissimilar, it could take approximately 5 or more added days of work (or 9 days to complete). The cost would then be in the neighborhood of $11,700.

Inventory Appraisals

Inventory appraisals typically start at $6,500, but it is not uncommon for them to range between $7,000 and $20,000, or even higher. That higher range in cost is based on the complexity of a company’s inventory. Factors that need to be considered include, but are not limited to:

• Quantity of SKU’s and groups.
• The intricacy of raw, work-in-process, and finished goods.
• The number of locations.

The following time periods are commonly required to perform an inventory appraisal:

• Typically 1 day per facility is required to speak with management, perform a walk through and random counts, and inspect the inventory.
• At least 1 day is needed to review and understand the company’s financial information. More time is sometimes needed, depending on the amount of available information.
• 2 days to perform research.
• 1 day to write, review, and complete the report.

Quotes for an appraisal are not uniform among appraisers. Certain assets are more challenging than others, and multiple locations may need to be viewed. This means that estimates among competing appraisers may vary significantly.

The Appraisal Process Explained

The process used in researching and conducting property appraisals is typically one or all of the following:

• Market Approach (aka Sales Comparison or Comparison Sales): One of the three recognized approaches used in appraisal analysis. This approach involves the collection of market data pertaining to the subject assets being appraised.
• Cost Approach: This approach assumes that an informed purchaser would pay no more for a property than the cost of producing a substitute property with the same utility.
• Income Approach: This approach considers value in relation to the present worth of future benefits derived from ownership. This is usually measured through the capitalization of a specific level of income.
• Depreciation: Depreciation is calculated based off the actual loss in value or worth of a property from all causes. It includes loss resulting from physical deterioration, functional obsolescence, and economic obsolescence.

Appraisal Factors

Machinery and Equipment Appraisal (M&E) Factors

For machinery and equipment appraisals, or M&E appraisals, appraisers consider the following:

• Date the equipment was manufactured.
• Model and serial number; this can sometimes be difficult to obtain due to location, inaccessibility, damage, or equipment that’s been repainted and thus covering information tags.
• Run time hours and maintenance records.

Other factors may include:

• Added options, accessories, tooling, software, and upgrades (which, may or may not be transferable)
• The location of a facility
• Possible environmental concerns
• New laws
• Seasonality

Rolling Stock, Warehouse, and Support Equipment Factors

Rolling stock, warehouse, and support equipment are typically easy to appraise. Their appraisal is based on:

• Their common usage and active marketplace
• Access to dealers
• Readily available comparables (e.g. from past auctions)

Specialized Manufacturing and Support Equipment Factors

Specialized manufacturing and support equipment, including high-tech and bio-tech, can be particularly challenging. There may be large disparities in price due to limited sale information, a smaller market, and manufacturers’ unwillingness to share information.

For obvious reasons, the appraiser’s experience and knowledge of where to research and the relevant market is crucial in determining accurate values.

Inventory Appraisal Factors

Inventory appraisals can consist of Raw Materials (RM), Work In Progress (WIP), and Finished Goods (FG). They are typically analyzed in conjunction with the company’s provided financials and/or additional information, such as:

• The last 24 months’ sales
• Gross margin by month
• Inventory levels by month, by product category
• Gross and net sales
• Top ten customers
• Slow-moving inventory aging reports, etc.

Not all companies can provide good information. Some have ‘perpetual inventory’ systems. Others may only utilize one key inventory management technique or combine various techniques. This can create challenges in verifying and understanding inventory.

In performing an inventory appraisal, there are other factors that should also be considered. Questions a good appraiser will ask include:

• Are the RMs generic, specialized, or proprietary?
• Can the WIP be realistically and cost-effectively converted to FGs?
• Are there any restrictions or agreements in selling the finished goods?
• Are there any territorial issues with wholesalers or distributors?

In addition to these factors, seasonality and costs to perform a properly run liquidation sale are always major considerations not to be overlooked.

Desktop Appraisals

Desktop appraisals are sometimes necessary when assets are off-site or at remote locations. This may cause the travel costs for a walk-through inspection to outweigh the benefits.

As a threshold matter, however, it must be stressed that financials and information systems can be altered or manipulated. It is thus a better practice for an appraiser to perform a walk-through inspection.

A proper walk-through inspection can reveal a host of information that company financials and information systems cannot. Examples include:

• Cleanliness of the facility
• Organization
• Condition of the assets
• Aged/dusty inventories, which typically indicate slow sales or obsolescence.

At a minimum, the ability to perform ‘on-the-spot’ random counts can help verify accuracy.

Desktop Appraisals can sometimes be less costly to perform than walk-through inspection reports. However, they often require the same amount of work and can be more difficult and time-consuming. This is because of the extra time an appraiser needs to allow for various assumptions, which a walk-through inspection could easily clarify.

Desktop Appraisals can therefore be valued conservatively due to a possible lack of detailed information and poor photographs. These may not show modifications, accessories, and upgrades, which can result in money being left off the table.

Cheap Appraisals Can Mean Poor Results

Price is usually very important to the party ordering the appraisal. Some appraisers may opt to lower their prices when asked, either because they are not very busy or because they can have a new or less experienced appraiser perform the work. For this reason, it’s important to understand the experience level of the appraiser who will actually inspect and research the assets. A less experienced appraiser or machinery checker may miss things.

Additionally, make sure to check that the person is Uniform Standards of Professional Appraisal Practice (USPAP) compliant and accredited. Accreditations and certifications require many hours every year of continuing education to maintain.

When weighing up two competing appraisal estimates, it is important to ensure that they are offering ‘apple to apple.’

Selecting a Personal Property Appraisal Firm and Ordering the Appraisal Report

The crucial first step in ordering a property appraisal is spending time with the prospective appraisal firm. Discuss the scope of work with them and explore the appraiser’s experience and understanding of the assets and marketplace.

When making important business decisions, an appraisal report must be able to be trusted and relied upon. This can only be accomplished by utilizing a proven appraiser who truly understands ‘all aspects’ of the assets in question.

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[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can view at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

1. Selecting the Right Valuation Expert
2. What’s it Worth? Valuing a Business for Sale
3. Valuing Your Brand and Other “Soft” Assets

This article was originally published on January 15, 2024. This article was most recently updated by the DailyDAC Editors.]

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