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Machinery and Equipment Appraisals: They're All About Levels of Trade - Appraisal Expert Provides Tips for Several Scenarios

As Originally Published by Auctioneer, January 2011.

By: Jack Young
Tel: 530-795-5536
Email Mr. Young


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Every machinery and equipment appraiser is most likely familiar with the phone call - "I've got some equipment that I need to have appraised. How much will it cost?"

And every appraiser should answer that question by saying something like, "The cost of an appraisal always depends on what kind of appraisal, location, volume and type equipment we are talking about."

The answer to the "how much" question depends not only on the amount and location of the equipment, but, just as importantly, on what machinery and equipment appraisers call "premise of value," also referred to as "levels of trade."

Beyond knowledge of the location, volume and type of equipment, there are two questions I need answered right away:

1. What is the purpose of the appraisal? Or more directly put by our good friend Roger Durkin, ASA, of Durkin Valuation Consultants, Boston: "When the client has the appraisal in hand, what are they going to do with it?"

As we all know, the reasons for an appraisal can be varied and multiple. Will the appraisal be used for collateral values in a loan, in an attempt to settle a loss claim with an insurance company, or to resolve a family law matter? A clear answer to this first question is crucial because that answer leads directly to the next question:

2. What premise of value will best meet the needs of the purpose of the appraisal, the answer to question No. 1?

Premise of value is a very interesting aspect of the machinery and equipment appraisal industry. Because we machinery and equipment appraisers deal with a variety of assets, most of which can be moved or sold in many different markets, or trade levels, it is necessary to recognize that items have different values depending on which market they're sold within. When we look at premise of value, or what some appraisers call levels of trade, we are determining the basic marketplace that one is presuming in the valuation.

I prefer the term "level of trade" to "premise of value" because clients seem to understand the meaning more clearly. Also, "premise of value" has a different, specific meaning to business valuation appraisers than it does in the equipment and machinery arena. Whatever term you prefer, levels (or premises) can be broadly divided into categories, which are distinguished mainly by an asset's anticipated use.

Four Trade Levels

Generally, we have four major levels of trade with various subsections within each. These levels are liquidation, sale for removal, continued use, and, of course, the catch-all category "other." Once we determine and confirm which of these values will be used in an appraisal, the Uniform Standards of Professional Appraisal Practice (USPAP) requires that the report "identify the type and definition of value." Being diligent in defining the definition of value used in the appraisal report is not just a good idea for compliance with USPAP, it is critical in preparing an understandable and useful report.

Liquidations

Forced and Orderly Liquidation values refer to what an appraiser terms "compelled sales," as neither assume a willing seller. We often see these sales in bankruptcy, repossession, divorce and for certain other legal situations. The compelling difference between the two is that a Forced Liquidation scenario assumes a "sense of immediacy," while an Orderly Liquidation scenario assumes "a reasonable period of time to find a purchaser(s)."

In some cases, there may not be a lot of difference between the final values when using these two premises. For many standard items of equipment, such as a John Deere 6330 tractor, for example, a properly advertised auction could produce the same value under both scenarios. With more specialized equipment; however - especially in a case where the center of industry may be thousands of miles away and there are a limited number of specialty buyers - there can be quite a difference in the price received by the seller who is "given a reasonable period of time to find a purchaser" and one who is "compelled to sell with a sense of immediacy."

Below is an example of the probable difference in value, assuming liquidation on specialty manufacturing equipment such as a LOH Model RF3A Automatic Curve Generator with attachments, tooling and upgrades. This is a piece of equipment generally used in the manufacturing of high precision optical equipment

Scenario No. 1: Forced Liquidation

. . .Continue to read rest of article (PDF).


Jack Young, ASA, CPA is an Accredited Senior Appraiser (ASA) of the American Society of Appraisers specializing in Machinery and Equipment Appraisals and a Certified Public Accountant (CPA). Mr. Young has also been awarded a Master Personal Property Appraiser (MPPA) designation from the National Auctioneers Association. He has thousands of hours experience as an Equipment Appraiser and is an active member of the Northern California Chapter of the ASA, where he serves as Chapter President.

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