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 one in connection with a capital raise or some other purpose? Regardless of the reason the need may arise, there are some baseline concepts that you should understand before hiring an appraisal firm. This article discusses some of them.
As a threshold matter, you need to understand these three key definitions (as defined by the American Society of Appraisers (“ASA”)):
Forced Liquidation (“FL”), An opinion of the gross amount, expressed in terms of money, that typically could 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” (usually a 4 to 6-week time frame).
Orderly Liquidation (“OL”), An opinion of the gross amount, expressed in terms of money, that typically could be 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.(usually a 3 to 6-month time frame).
Fair Market Value (“FMV”), An opinion expressed in terms of money, at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts, as of a specific date (usually unlimited time frame).
FL and OL appraisal reports are generally used in asset based lending or for an auction or liquidation.
FMV appraisals are generally used for continued use/allocate purchase price, or when a company is being sold as an on-going concern.
In determining the price at which to perform a personal property appraisal, most appraisal firms use a daily rate of approximately $1,200 to $1,500 (plus travel related expenses, should they be required). This daily rate takes into account the time required to perform a walk-through inspection (if needed), photograph relevant assets, meet with management, and to conduct reliable research and write the report. Each appraisal is typically performed by one individual, however based on timing, or if numerous locations need to be examined, additional appraisers or support staff could be used (at ,of course, an increased cost).
In determining the cost to perform an appraisal and using a daily rate of $1,300 for a Machinery & Equipment appraisal, consider the following, (please keep in mind this is based on the utilization of averages & does not including travel expenses, should they be required):
One day is commonly required to walk one facility. A qualified appraiser can usually inspect about 20 CNC machines plus support equipment/tooling, warehouse, and office equipment.
Approximately 20 machines can be researched per day. However, if the machines are more complex or specialized, it could take approximately two to four days “per one day of inspection.”
One day is typically needed to write, review and complete the report.
For example, using the above $1,300 per day rate for an appraisal that has 20 CNC or similar machines, it would require (one inspection day, two days researching values and one day writing the report) at a cost of $5,200 (or slightly higher). Should there be 100 CNC machines, but within that group there are 20 “similar” or like machines, it could still be a $5,200 appraisal. But, if all are dissimilar, it could take approximately five or more added days of work, or nine days to complete, with the cost then being in the neighborhood of $11,700.
Inventory appraisals typically start at $6,500, but are not uncommon to range between $7,000 and $20,000, or higher. This higher range in cost is based on the complexity of a company’s inventory. Factors that need to be considered include (and are not limited to
Based on using a $1,300 per day rate, one is well advised to consider that the following time periods are commonly required:
One might conclude, then, that an appraiser’s quote for an appraisal, based on using an asset list or financial statements provided by the party seeking the appraisal should be fairly straightforward to calculate and somewhat uniform among several appraisers. However, because certain assets are more challenging than others, and multiple locations may need to be viewed, estimates among competing appraisers may vary significantly.
As for the process used in researching and conducting appraisals, appraisers typically use one or all of the following:
Market Approach (a/k/a 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 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.
Income Approach – This 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.
Depreciation – The actual loss in value or worth of a property from all causes including those resulting from physical deterioration, functional obsolescence, and economic obsolescence.
As for M&E appraisals, appraisers should consider the date the equipment was manufactured, its model and serial number (this can sometimes be difficult to obtain due to location, inaccessibility, damage, or equipment that’s been repainted thus covering information tags), and other factors such as run time hours and maintenance records.
Other factors may include: added options, accessories, tooling, software, upgrades, (which, may or may not be transferable), the location of a facility, possible environmental concerns, new laws, and seasonality.
Rolling stock, Warehouse, and Support equipment are typically fairly easy to appraise, based on their common usage/active marketplace, access to dealers and readily available comparables (from past auctions, for example).
Specialized manufacturing and support equipment, including high-tech and bio-tech can be particularly challenging, and have large disparities in price, due to limited sale information, a smaller market, manufactures’ unwillingness to share information. For obvious reasons, experience, including knowing where to research, and knowing the market they trade-in, is crucial in determining accurate values.
Inventory appraisals, which can consist of Raw Materials (“RM”), Work In Progress (“WIP”), and Finished Goods (“FG“) are typically analyzed in conjunction with using the company’s provided financials and/or additional information such as: 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, however, can provide good information; some have “perpetual inventory” systems while others may only utilize a one key inventory management technique or combine a variety of techniques- which can create challenges in verifying and understanding their inventory.
In performing an inventory appraisal, there are other factors that should be considered. Questions a good appraiser asks include:
Also, seasonality and costs to perform a properly run liquidation sale, are always major considerations.
Desktop appraisals can sometimes be necessary due to assets being off-site or at remote locations where travel cost to make a walk-through inspection can outweigh benefits.
As a threshold matter, however, it must be stressed that financials and information systems can be altered or manipulated and it is therefore general better practice for an appraiser to perform a walk-through inspection. Moreover, a proper walk-through inspection can reveal a host of information that company financials/information systems cannot. Examples include: cleanliness of the facility, organization, condition of the assets, and aged/dusty inventories (which typically indicates slow sales or obsolescence). At a minimum, the ability to perform “on-the-spot” random counts can help verify accuracy.
The Uniform Standards of Professional Appraisal Practice’s (“USPAP”) definition of a Desktop Appraisal is:
“An appraisal of limited scope whereby the appraiser estimates the value of the equipment from his desk with only a listing supplied to him, and without benefit of a physical inspection of that equipment. Critical assumptions are made as to condition, age, location, physical appearance, ease of removal, and other pertinent factors that may affect value. An aggregate value is determined in a limited appraisal report including all limiting conditions, critical assumptions, and definitions of values, approaches to value, conducted and written to comply with all standards of USPAP.”
Desktop Appraisals “can sometimes” be less costly to perform than walk-through inspection reports. However, Desktop Appraisals often require the same amount of work as a walk-through inspection and sometimes are more difficult and time consuming because of the extra time an appraiser needs to allow for various assumptions, which a walk-through inspection could easily clarify. Because of this, Desktop Appraisals can sometimes be valued conservatively, due to lack of detailed information/poor photographs, which may not show modifications, accessories and upgrades. All of this can result in money being left on the table.
When ordering an appraisal, price is commonly very important to the party doing the ordering. Some appraisers may opt to lower their prices when asked, either because they are not very busy or because they may be able to 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, and if the person is USPAP complainant and accredited.
Accreditations and certifications require many hours every year of continuing education to maintain. For this reason, and since less experienced “appraiser/machinery checker(s)” may simply miss things, it important that the client make sure that two competing appraisal estimates are “apple to apple.”
“Bias and conflict of interest” can occur if the appraisal is being performed by the same firm that could potentially conduct the auction or liquidation. This can cause conservative approaches to value, and various legal issues, should the report be challenged in court.(add period)
This may be of particular concern with Forced Liquidation (FL) values, because of the temptation of an “Auction, Liquidation & Appraisal Firm” possibly wanting to buy the assets at a lower price, or in a commission scenario, with the desire to exceed expectations along with using higher expense costs.
This topic can be much debated and argued, and all one needs to do is go online and look up “bias and conflict of interest” to see various articles from a myriad of professionals.
In closing, 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(s) that truly understand “all aspects” of the assets in question.
When ordering an appraisal, it’s important that one spends some time with the firm to discuss the “scope of work” and explore the appraiser’s experience and understanding of the assets, and the marketplace they’re traded in.
Mike has 22 years’ experience in the Auction, Liquidation & Appraisal industry with all forms of Manufacturing and Support Equipment, and Inventory. Over the years he has performed or consulted on hundreds of appraisals, auctions and liquidations for Banks, Attorneys, Turnaround Firms, and Accountants.
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