Wednesday, April 25, 2007

Why does an equipment appraisal cost more?

We are often asked why an equipment appraisal costs more than a business appraisal. The simple answer is that in most basic business appraisals, the appraiser determines the Cash Flow or EBITDA or Seller's Discretionary Earnings generated from the business and then most often values the business on the Income Method and Market Method. The Income Method requires the appraiser to determine a value based on historical income and often times discounted future earnings. These values for these methods can be determined through a program. The Market Method is also fairly easy to determine because there are numerous data bases such as Pratt's Stats, BizComps, and others that provide market comps.

When determining machinery and equipment values the Income Method is seldom used because the income derived from a single piece of equipment can be extremely difficult to calculate as it is usually a part of an entire process or processes. Furthermore, when looking to determine Market Value for a machinery and equipment appraisal there is no one or multiple database sources for comparables. Each piece of equipment must be analyzed to determine condition, functionality and in many cases hours used or other values that determine useful life. For this reason there is much more individual analysis involved and thus often times the reason for a higher cost.