Hi, I’m Chris Walton, author of this guide and CEO of Eton Venture Services.
I’ve spent much of my career working as a corporate transactional lawyer at Gunderson Dettmer, becoming an expert in tax law & venture financing. Since starting Eton, I’ve completed thousands of business valuations for companies of all sizes.
Read my full bio here.
Whether it’s for mergers, tax compliance, or loan approvals, getting your machinery and equipment valuations right is a must.
A valuation is used to identify, determine, and put a price on the value of your assets.
Inaccurate valuations can lead to:
This process can seem complex for business owners.
So, in this article, we’ll share the behind-the-scenes of how we approach equipment valuations for our clients.
Key Takeaways
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Machinery and equipment valuation is necessary to figure out the “fair market value” of your business’s physical assets like machines, tools, and equipment.
“Fair market value” means the price these assets would likely sell for in the current market between a willing buyer and seller.
Knowing the true value of your machinery and equipment is crucial in these situations:
An independent valuation expert will ensure your valuations are inaccurate and defensible, without the hassle and stress.
How often you need to get your machinery and equipment valued depends on what kind of business you have, how much you use your equipment, market conditions, and regulatory requirements.
Several factors can influence the fair market value of your machinery and equipment:
Newer equipment in good condition is usually worth more because it has a longer life and needs fewer repairs.
Older equipment, especially if it shows wear and tear, tends to be valued lower. This is because older machines may break down more often and cost more to maintain.
For example, a well-maintained 5-year-old bulldozer will sell for more than a 10-year-old one that needs repairs.
Equipment with the latest technology is often valued higher because it is more efficient and productive.
Machines with outdated technology may not perform as well and could be harder to sell.
For example, a manufacturing machine with new automation features will sell for more than an older model without them.
The value of equipment depends on how many people want to buy it. High demand increases prices because more buyers are interested.
Low demand decreases value since fewer people want to buy.
For instance, drilling rigs are worth more during an oil industry boom but less during a downturn.
Equipment from well-known brands is usually valued higher because they are trusted for reliability and durability.
Lesser-known brands often sell for less.
Lightly used equipment is worth more because it has less wear and tear.
Heavily used equipment might be closer to the end of its life and sell for less.
For example, a lightly used excavator will be worth more than the one used heavily.
Equipment with detailed maintenance records is often valued higher because buyers know it has been taken care of.
Without records, even well-maintained equipment might sell for less due to uncertainty.
For example, an airplane with complete maintenance records sells for more than one without.
A strong economy can increase equipments’ value as businesses grow and invest.
In a recession, values may drop as spending decreases.
For example, construction equipment might sell for more during an economic boom but less in a downturn.
Equipment that meets current regulations is worth more because it can be used without costly updates.
Non-compliant equipment may need modifications, lowering its value.
For example, compliant food processing equipment sells for more than older, non-compliant models.
Now let’s explore the steps involved in the valuation process.
Valuing machinery and equipment is a nuanced and complicated process. Hiring valuation experts can help ensure accurate results.
At Eton, we have over 20 years of experience and have done more than 3,000 valuations, including machinery and equipment.
Here are the steps we follow:
Time taken: 1-2 days (Client side)
The first step in working with a consultant will be documentation collection.
This is often a bottleneck—as it takes your team time to collect and prepare information.
At Eton, we request:
Time taken: 1 day (Our side)
The valuation date is the date on which the fair market value of your machinery and equipment will be determined.
If you’re not sure what date to choose, we’ll make some suggestions based on the following:
Time taken: Valuation expert will take anywhere from 1-7 days (depending on specified turnaround time)
This is where advanced methodologies are used to determine your machinery and equipment.
The three commonly used machinery and equipment valuation methodologies are:
The income approach estimates the value of an asset by looking at the expected future income.
It considers things like cash flow and expenses.
This method is often used to value income-generating assets like real estate and businesses, but it is also adapted for machinery and equipment that earns money by being rented out or used in other ways, such as construction equipment.
Here are the steps involved:
Present Value = Future Income / (1 + CapRate)^n
Where:
Present Value: The current value of the future income stream.
Future Income: The income expected to be generated over a specific period.
CapRate: The capitalization rate, which reflects the rate of return expected from the investment.
n: The number of years into the future that the income is projected.
Example: Valuation of a bulldozer using the income approach
Equipment Details: 2019 XYZ Bulldozer, Purchase Price: $75,000, Cap Rate: 7%
Net Income Over 5 Years:
Present Value Calculation:
Total Present Value: $54,742
Depreciation: $30,000
Final Value: $54,742 – $30,000 = $24,742
The asset approach is based on the market value of a company’s net tangible assets minus liabilities.
This method is often used for businesses that have a lot of assets, like real estate or manufacturing companies.
Steps:
Net Asset Value= Total Assets – Total Liabilities
Example Calculation:
The equipment is worth $80,000.
The market approach uses sales data from comparable assets to find the value of your machinery or equipment.
This method is often used when many similar assets are bought and sold, such as construction equipment or vehicles.
Steps for market approach in machinery and equipment valuation:
Formula:
Value of Asset = Comparable Sales Price + Adjustments
Example: Industrial Lathe
Adjusted Prices:
Estimated Value: (50,000 + 53,000 + 49,000) / 3 = $50,667
Delivered on: Day 7 (by valuation expert)
Your dedicated analyst will prepare the draft valuation calculations, which include:
We’ll let you know when you can expect to receive this draft. That way you can reserve time in your schedule to review it.
As soon as it’s completed, we’ll send them to you.
Received on: Day 10 (Client to review and raise any concerns)
Time taken to finalize: 1-2 days
Review the draft report and check the assumptions and valuation numbers.
If anything is unclear, you can schedule a 1-hour video call to discuss issues.
Once you’re satisfied, you’ll authorize us to prepare the final report, delivered in 1-2 days.
We also offer post-valuation services to defend the valuations in court if needed.
The exact price depends on:
Big investment banks may charge significantly higher fees due to their extensive overheads and the scale of operations.
But independent firms like Eton offer the same quality at lower costs. Our team members have worked at leading accounting firms, including the Big 4 (Deloitte, PwC, EY, and KPMG).
We bring the same level of rigorous standards and deep expertise, but without the inflated prices.
What’s included in our machinery and equipment valuation costs
We’re a boutique valuation specialist, so we offer careful customer service and top-tier valuation expertise with affordable prices.
For most machinery and equipment valuations, we offer flat-rate fee structures.
These include:
Most of the machinery and equipment valuation process is in our hands, but for the few tasks you’re responsible for, this is what I’d advise:
Having completed numerous machinery and equipment valuations, we’ve fine-tuned our process to be as smooth as possible for our clients.
If you want to be among them, get in touch here. We’ll deliver a machinery and equipment valuation that’s accurate, compliant, and audit-defensible.
Related Reads:
Schedule a free consultation meeting to discuss your valuation needs.
Chris co-founded Eton Venture Services in 2010 to provide mission-critical valuations to venture-based companies. He works closely with each client’s leadership team, board of directors, internal / external counsel, and independent auditor to develop detailed financial models and create accurate, audit-proof valuations.
