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. 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”):
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). That daily rate takes into account the time required to perform a walk-through inspection (if needed), photograph relevant assets, meet with management, and conduct reliable research and write the report. Each property 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. Of course, that would mean 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 that those estimations are based on the utilization of averages, and do not include travel expenses.
Inventory appraisals typically start at $6,500, but are not uncommon to range between $7,000 and $20,000, or higher. That 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:
As for M&E appraisals, appraisers should consider the following:
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 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 and 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: 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, however, can provide good information. Some have “perpetual inventory” systems. 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 the travel costs for a walk-through inspection can outweigh the benefits.
As a threshold matter, however, it must be stressed that financials and information systems can be altered or manipulated, and it is therefore a 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 indicate 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 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 compliant and accredited.
Accreditations and certifications require many hours every year of continuing education to maintain. For this reason, and because less experienced “appraiser/machinery checker(s)” may miss things, it is important that the client make sure that two competing appraisal estimates are “apple to apple.”
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 understands “all aspects” of the assets in question.
When ordering a property 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.
[Editor’s Note: To learn more about this and related topics, you may want to attend the following webinars: Representing Asset Purchasers in Bankruptcy and How to Value Your Assets. This is an updated version of an article originally published on April 27, 2016.]
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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