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 v. OL v. FMV

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
  • 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 (“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(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 expressed in terms of money, 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)

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.

Basic Appraisal Pricing

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
• 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.

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—and using a daily rate of $1,300 for a Machinery & Equipment appraisal—consider the following points. Please keep in mind that these estimations are based on the utilization of averages and do not include travel expenses:

• 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

For example, using the above $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, and 1 day writing the report. This could amount to a cost of $5,200 (or slightly higher).

Furthermore, 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) with the cost then being 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 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
• 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, sometimes longer dependent upon the amount of available information, to review and understand the company’s financial 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, so estimates among competing appraisers may vary significantly.

The Appraisal Process Explained

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
  • Based on the proposition that an 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
  • Considers value in relation to the present worth of future benefits derived from ownership
  • Usually measured through the capitalization of a specific level of income
• Depreciation
  • Based off the actual loss in value or worth of a property from all causes
  • Includes loss resulting from physical deterioration, functional obsolescence, and economic obsolescence

Appraisal Factors

Machinery and Appraisal (M&E) Factors

As 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—thus covering information tags)
• 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 Factors

Rolling stock, warehouse, and support equipment are typically easy to appraise. This is based on their common usage and active marketplace, access to dealers, and readily available comparables (from past auctions, for example).

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 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 Factors

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 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 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 or territorial issues with wholesalers or distributors?

Also, seasonality and costs to perform a properly run liquidation sale are always major considerations not to be overlooked.

Desktop Appraisals

Desktop appraisals can sometimes be necessary due to assets being 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, therefore, 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.

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. 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 the potential for lack of detailed information and poor photographs. These may not show modifications, accessories, and upgrades, which can result in money left on the table.

Cheap Appraisals Can Mean Poor Results

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.”

Selecting A Personal Property Appraisal Firm and Ordering the Appraisal Report

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) who truly understands “all aspects” of the assets in question.

When ordering a property appraisal, it’s important to spend some time with the prospective appraisal firm to discuss the “scope of work” and to explore the appraiser’s experience and understanding of the assets and marketplace.

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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 watch at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

• Leading Professionals to Teach About Valuation
• What’s it Worth? Valuing a Business for Sale
• Valuation

This is an updated version of an article originally published on February 18, 2020.]

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