Appraisals are something with which we all feel relatively familiar. Many of us have had an appraisal conducted for various reasons in our lives — on a home, a piece of jewelry, and likely for general insurance coverage on our business enterprises. We feel we know the basic steps of an appraisal — from a site visit during which the appraiser gathers information and makes initial evaluations to the research conducted to ensure a framework of common values and prices to the final results compiled in a report.
Yet beyond the basics, have you considered how an appraisal can add to your business success? Have you ever thought of an appraisal as a critical tool for survival?
Here are five steps you can take toward understanding appraisals as a readily available tool, one that will help you use them to maximize the assets you already have in your company.
Many business owners may have had an initial appraisal to secure sufficient insurance on their commercial property. But this general appraisal does not begin to cover the risk areas left exposed over time. Without the objective assessment in an appraisal report, such as the insurable value of all your assets or the details provided by an appraiser's replacement cost studies, your reported loss on a critical piece of machinery or valuable property site can compound into lost months of production — and, even more dire, the potential loss of customers.
With an updated and detailed appraisal, customers who file an insurance claim due to a fire or other natural disaster are going to experience less aggravation and quicker cash turnaround for equipment settlements from their insurance companies.
Appraisals as tools
Almost every enterprise, at one time or another, needs the financial flexibility to access extra funds. This could be in order to grow or to bridge gaps during long sales cycles or to help turn around an underperforming situation. An accurate and updated appraisal on your inventory, equipment and/or real estate holdings provides lenders with excellent, immediate proof of your credit-worthy status.
Consider, for example, how many companies find themselves in the unfortunate position of walking away from a large job just because they can't purchase the machinery outright.
An appraisal is an effective tool to deliver the necessary line of credit, just when you need it most.
Appraisals also can be great resources of information for formulating feasibility and marketability, and conducting highest-and- best-use analyses for evaluation and planning purposes.
Appraisers are involved daily in the buying and selling of used machinery. This daily activity in the machinery and equipment marketplace gives appraisers first-hand understanding of the dynamic economic swings in our industry, which influence machinery values. By conducting an appraisal of your assets, you are in a constant state of preparation for whatever the future holds — streamlining your business in lean times or increasing operations when the market allows.
Determining the value of a business is not a simple task. Unlike a car, there is no single resource such as a blue book to verify value. Each business offers unique characteristics that impact worth. Yet deals never get done without an accurate and independent assessment of these details.
In this day of mergers and acquisitions, financial managers must always be prepared to put a value on their entire company, a division or even a department. But without the proper guidance, where do you start? How can you even determine when a professional appraisal is needed? Having an accurate and updated appraisal is the first, best step of such a major undertaking and goes a long way toward ensuring a successful M&A.
As important a tool as an appraisal can be for all these areas of operation, it must be credible in order to have any value. And credibility only comes with knowledgeable appraisers.
While appraisals are not normally a precise measurement, neither are they guesses. Appraisals are opinions based on informed judgment and supported by facts. The experience and expertise of an appraisal can have a profound bearing on the outcome of your transaction. Choosing a firm that does not understand your needs will most likely result in an appraisal report of lower quality. Credentials and objectivity are two key factors your appraisal firm should possess. Experience also plays a large role in the viability of your report.
To determine if the appraisal company you are considering is right for you, ask these questions:
* Does the appraisal company specialize in your industry?
* Does it understand your machinery? Ask technical questions about your equipment specifications, such as electric vs. hydraulic drives, or questions about trends in your industry including the latest “hot sellers.”
* Does the firm have historical data on the equipment it is appraising?
* What are its methods for obtaining historical data?
* What are the firm's sources and how accurate is the data?
The right appraiser does not create value, but interprets the market to arrive at a value estimate that can help your business grow and thrive — now and in the future.
Donald Kruschke is an appraiser with Stopol Inc. in Solon, Ohio.