Finance column: Evaluating used machinery

O-automation is used to transport the workpieces, with the pick-up principle employed to load and unload them.

Equipment valuation is an important consideration in any successful machine shop. If you own a piece of machinery or equipment, you need to understand how it’s valued for insurance, estate planning, partner or shareholder buy-outs; or if the older piece must be sold to make room for upgraded technology.

In terms of financing, machinery and equipment owned free and clear may also be leveraged in the event the business requires some working capital. Regardless of the motivation for the valuation, the process usually involves a set of common factors.

From a professional standpoint, the Association of Machinery and Equipment Appraisers (AMEA) is the premier international organization for certified equipment appraisers. They specialize in appraising machinery and equipment and I’m very fortunate to be a member of this association.

Below are a few of the more important aspects a certified appraiser would consider during valuations:

1. Manufacturer and class: There are many different builders of machinery and equipment, all of whom have their place in the market. The idea here is to think about how that manufacturer is perceived in the marketplace. The answer to this question can be found in the approximate number of existing installations and whether those machines are known to maintain tolerances over time (if properly maintained).

Most importantly, what is the availability of spare parts and technical support? A piece of equipment may have an excellent reputation but if you can’t find anyone credible to provide parts and service, the value of the piece will be significantly reduced.

2. Model and age: As long as the machine can be inspected in person, finding the model and age is relatively easy. It’s normally stamped on a plate attached to a major component of the machine (such as the column, table, or electrical panel). Once this information is confirmed—and assuming the manufacturer has had stable representation in the market—the equipment can be researched.

3. Usage: This is very important since the same machine can be used to manufacture a variety of different parts across a wide number of industries, and there are plenty of differences between manufacturing environments. Two machines of identical age could have vastly different values depending on how they were used. An average machine tool is run 2,000 hours per year which is known as one shift (eight hours per day, five days per week).

However, the largest customer base for machine tools in Southern Ontario is the automotive industry, which is known to run machines much harder; in many cases two or three shifts. In this case, two identical machines of the same age will be valued quite differently to account for the additional usage.

4. Condition: A machine tool is designed to manufacture parts to very tight tolerances, in many cases microns (thousandths of an inch) and in order to function properly over a long period of time it requires regular maintenance. In the world of machine tools, this means preventive maintenance— no different than any other mechanical asset.

The amount of maintenance a machine requires is related not only to its usage but also to the type of material it has been cutting. A piece of equipment that has been cutting aluminum, a light material which is very easy to machine will be in significantly better condition (and in turn worth more) than an identical piece which has been cutting cast iron, a very abrasive material which produces chips that are known to cause long term damage.

5. Original purchase price: This seems like an obvious place to confirm value but it’s not always easy to appraise based on the original purchase price. The equipment may have been purchased with additional options which had value to the original owner but not to future ones (such as specialized chip conveyors, loading systems, fixturing/workholding devices, engineering fees).

It’s also possible the piece is considered an SPM (special purpose machine) which basically means it was manufactured to produce a singular part for a particular customer, very valuable to the company which has that contract but of no value to anyone who does not.

6. Replacement cost: In many cases, particularly for older equipment, it’s tough to determine the original selling price. The next place to look is replacement cost. There are many instances however where this may not be so easy to find. In turn, it may have an impact on value. For example, the model might no longer be manufactured because it was redesigned or upgraded.

Or perhaps the model didn’t sell well because of its price point and therefore was dropped from production, or there were design issues. There are a myriad or reasons why finding a replacement cost could prove difficult so the reasons must be researched.

In today’s world, researching a piece of equipment is relatively easy. If it’s a standard machine tool built by a well-established manufacturer and has sold well, finding a similar model and age for sale can be done with a simple Internet search.

But just finding a quote for a similar machine and using that exclusively as the basis for value may be problematic. Back in my days as a machinery dealer there were many times we sold a machine and had to take it back for whatever reason.

When we remarketed it, the selling price was more a reflection of us trying to get costs out of the deal and less about current market pricing. There are also cases where a dealer may be offering a machine they do not own — marketing it on behalf of a good client, and the asking price is determined by the owner based on what is owed on the machine if it’s being financed.

There are many factors influencing how any piece of machinery and equipment is valued, but if there’s one take away, it’s this: invest in well-established brand-named equipment regardless of whether funds are from your own account, your bank, or a private lending institution.

That way, you’ll always add value to or provide options for your business.

Ken Hurwitz is senior account manager with Enable Capital Corp., an asset-based lending company in Toronto.

Contact Ken at (416) 614-5878 or via email at khurwitz@enablecapitalcorp.com

Learn more at: www.enablecapitalcorp.com