Are you paying the right price for the Appraisal you ordered?
** Reprint Permission: Michael Kletecka
In determining the price to perform a Forced Liquidation (FL), Orderly Liquidation (OL), or Fair Market Value (FMV) appraisal for Machinery, Equipment, and Inventory, most appraisal firms use a daily rate of $1,200 to $1,500 (plus travel related expenses, should they be required). This daily rate takes into account the time to perform a walk-through inspection (if required), photograph various assets, meet with management and time to properly research and write the report.
Based on the above, along with some information about a project derived from provided asset lists or financials, it would appear somewhat simple to determine the price to pay for an appraisal, however because some assets are more difficult to research than others, and multiple locations may need to be seen, this can affect the price of an appraisal significantly.
“Are you paying the right price for your appraisals” can essentially be answered with the question, “Did the appraisal address the scope of work and properly explain, and clearly justify its findings. And, if it should it be required, will the appraisal hold up in court? If so, and you paid $5,000 for what should have been a $10,000 appraisal, you got a bargain and if you paid $10,000, you got what you paid for. However, if the report proves to be poorly researched, inaccurate, and overlooked important aspects of the project, then it was money wasted.
As for the price one should pay for Machinery, Equipment or Inventory appraisal, I’ll do my best in providing a basic/rough cut method to consider, which is based from my 20 year career in having performed approximately 250 appraisals and the experience I’ve had with a couple of appraisal firms.
Using a daily rate of $1,300 for a Machinery & Equipment appraisal, here’s the following to consider, (please keep in mind this is based on an average basis):
- One day is usually required (which includes travel time) to walk “one” facility.
A qualified appraiser can usually inspect about 20 CNC machines including
support equipment/tooling, warehouse, office, and support equipment. - Approximately 20 machines can be researched per day. (however, it could
take approximately two days of research “per one day of inspection”, and if
the CNC equipment is more complex, up to four days of research). - One day is typically needed to write, complete, and review the report.
For example, using the above for an appraisal that has 20 CNC machines, it would require (1-Inspection day, 2-researching values, 1-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 they are all dissimilar, it could take approximately 5 or more added days of research to complete, with the cost being $9,100.
As for the cost of Inventory appraisals, they typically start at $6,500 depending on the number of SKUs and type of assets. Based on using $1,300 per day, here’s the following to consider:
- One day is usually required (which includes travel time) to speak with
management, walk “one” facility, perform random counts and inspect
the inventory. - One day to review and understand the company’s financial information
(sometimes longer, if there’s limited information). - Two days to perform research.
- One day to write, complete and review the report.
In my career, I’ve rarely seen an inventory appraisal report performed for less than $6,500, most are between $7,000 to $20,000 and sometimes more. This increased range in cost is based on the complexity of a company’s inventory such as quantity of SKU’s and groups, perishable/non perishable, expiration dates, multiple locations, intricacy of raw, work-in-process, finished goods, etc.
To help insure that you’re getting what you pay for with a properly researched appraisal (which is a mix of art & experience), various factors should be considered. For example, a typical MACHINERY & EQUIPMENT APPRAISAL considers the date the equipment was manufactured, the model number 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), also technology factors, run time hours, and maintenance records.
In addition, there are other factors: Added options; Accessories; Tooling; Software; Upgrades; (which may or may not be transferable.) The location of a facility, possible environmental concerns and new laws, and seasonality, can be important information to consider. If not taken into account, this can greatly affect estimated values.
Rolling stock, Warehouse, and Support equipment are usually fairly easy to appraise, based on their common usage/active marketplace, access to numerous dealers and readily available internet price comparables and auction results. Whereas, manufacturing and specialized equipment, including high-tech and bio-tech can be particularly challenging because of limited sale information, to “large disparities in price”, which could possibly be caused from poor marketing to potential obsolescence, also lack of dealers and manufactures willing to share information. In either case, experience, where to research, and knowing the market they trade in is essential in determining accurate values.
As for INVENTORY APPRAISALS, consisting of Raw Materials (RM), Work In Progress (WIP), and Finished Goods (FG), or all, they are typically analyzed via the company’s 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.
However, not all companies have “perpetual inventory” systems, with many utilizing a one key inventory management technique, or combine a variety of techniques, which can create challenges in verifying and understanding their inventory.
Unfortunately, information systems can be altered or manipulated; therefore it’s wise to perform a walk through inspection. Also, a proper walk through inspection can reveal a host of information that company financials/information systems can’t, such as cleanliness of the facility, organization, condition of the assets, and the ability to perform “on-the-spot” random counts to verify accuracy. Also, to spot potential aged/ dusty inventories, which typically indicates slow sales, or obsolescence?
In performing an inventory appraisal, there are other factors that must be considered, such as: Are the Raw Materials generic, specialized, or proprietary? Can the Work in Progress be realistically and cost effectively converted to Finished Goods? Are there any restrictions or agreements in selling the Finished goods, or territorial issues with wholesalers or distributors? Seasonality and costs to perform a properly orchestrated 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 can outweighs benefits.
The Uniform Standards of Professional Appraisal Practice (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 (Uniform Standards of Professional Appraisal Practice)”.
As mentioned, Desktop Appraisals “can sometimes” be less costly to perform than walkthrough 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 are typically valued conservatively leaving money on the table.
When ordering an appraisal, price is very important, and some appraisers & firms may opt to lower their prices, sometimes this is based on not being very busy, or having a new or less experienced non compliant appraiser perform the work, instead of a senior “accredited” appraiser. For this reason it’s important to understand the experience level of the appraiser who will actually inspect and research the assets and if there USPAP complainant and accredited.
If firms use a less experienced “appraiser/machinery checker(s)” to inspect and catalog the assets, they can potentially leave out important facts such as accessories, damage or missing elements that effect value, etc. which an experienced accredited appraiser is trained to look for. (Accreditations and certifications require many hours every year of continuing education to maintain)
Also, “bias & conflict of interest” can occur should the appraisal be 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, and if the appraiser is not willing or not able to defend it in court. This can particularly happen 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, the desire to exceed expectations along with using higher expense costs. This can make objectivity a difficult mental exercise, even for a genuinely honest person. However, some may want and prefer this approach, which often leads to overly conservative values.
This topic can be much debated and argued, and all one needs to do is to go on line and look up “bias and conflict of interest” to see various articles from a host of different professions ranging from, *Conflict of interest and the intrusion of bias, to *Auditor Independence, Conflict of Interest, and the Unconscious Intrusion of Bias and *Principles of Appraisal Practice and Code of Ethics of the American Society of Appraisers (ASA), to name a few.
Because of potential “bias and conflict of interest” American Auctioneers Group (AAG) chooses to refer all appraisals to SMS Appraisal Services, David Eichner (President and Founder); an experienced senior ASA accredited and AMEA certified appraiser that specializes in Machinery, Equipment and Inventory. AAG only provides verbal “opinions of value” or auction proposals that approximates the range of estimated returns expected “at that moment in time” for a company’s assets that are ready to be sold at Auction or Liquidation.
In closing, when making important business decisions, an appraisal report must be trusted and relied upon, which 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, which will help insure that “you’re paying the right price for the appraisal you ordered”
*Conflict of interest and the intrusion of bias
Judgment and Decision Making, Vol. 5, No. 1, February 2010, pp. 37–53
Don A. Moore¤
Carnegie Mellon University
Lloyd Tanlu
University of Washington
Max H. Bazerman
Harvard University
http://journal.sjdm.org/10/91104/jdm91104.pdf
*Auditor Independence, Conflict of Interest, and the
Unconscious Intrusion of Bias
Don A. Moore
Carnegie Mellon University
https://student-3k.tepper.cmu.edu/GSIADOC/wp/2002-19.pdf
*ASA –American Society of Appraisers (ASA)
http://www.appraisers.org/docs/default-source/discipline_bv/bv-standards.pdf?sfvrsn=0
- (ASA),American Society of Appraisers – Accredited Senior Appraiser. (CEA), “AMEA”, Association of Machinery and Equipment Appraisers, Certified Equipment Appraiser