Equipment Appraisals - is there a way to help ensure they come back high?

November 18, 2019

by a searcher from Dartmouth College in Allentown, PA, USA

I'm working on a deal for a manufacturing company. A big component of my financing picture relies on the company's operating equipment being appraised at a high value ($2mm+). The company has numerous trucks and cars, plus other heavy, fixed manufacturing equipment. A lot of this equipment is 10+ years old but still in great condition.

My understanding is that commercial banks are required to select an appraiser for real estate and manage that process; however, for an equipment appraisal, buyers can get appraisals done independently and then share it with banks for underwriting.

Does anyone have any tips or tricks that are helpful for getting an equipment appraisal to come back high? I'm not looking for an unfair appraisal -- I just want to make sure the equipment is considered in its best light and assigned the highest, fair value.

I spoke with one appraisal company who said they could offer me three different types of appraisals: Fair Market Value; Orderly Liquidation Value; or Liquidation (Auction) Value. They said the Fair Market Value would be the highest value.

Will banks accept a "fair market value" appraisal for equipment? Is there anything else I can do to make sure I put the equipment in the best position to appraise high and be acceptable to the bank?

Thank you in advance for any thoughts and feedback!

Reply by a searcher
from Dartmouth College in Boston, MA, USA

Big question here is are you using SBA secured financing? If yes, you're in a tough spot as they have rules around how banks can value FFE / inventory which are really penal. For instance, I think general equipment can be underwritten for 10-20% of appraised value. The logic is that (a) people will inflate equipment values and (b) the market for used manufacturing equipment isn't transparent or necessarily super liquid.

With all of that said, if you're not using SBA financing, it's totally up to your bank. No bank will stop you from having an appraisal of the equipment done - many will require it if it constitutes a big part of the collateral for your loan.

One thing you can do to influence the value if you're not using SBA financing is to identify buyers for the equipment should it need to be sold. This is something you can ask the seller to help you with as well, if you're on good terms with them.

Unfortunately I think a lot of searchers, and bankers for that matter, over value equipment in the up front work and it causes a problem at the last minute when the underwriters/auditors get their hands on the deal.

Reply by a searcher
from Columbia University in New York, NY, USA

I've had this conversation with several lenders for PP&E heavy targets. Typically, the appraisal will be expressed in FMV, but the bank will know what OLV is, and will (if they are savvy) align their underwriting with OLV. Put yourself in their shoes: if the company goes belly up, they get to run a fire sale and that's all they get.

I might ask: why do you want to inflate the value of your appraisal? If its your money or your friendly investors, you're only hurting yourself. Better, I think, to set the seller's expectations that their equipment is an important part of the value of their company (and through that lens, you might want the lowest fair/actual value).

Sure, that risks blowing up the deal, but better no deal than a bad deal.

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