To answer this question, the scope of the project must be accurately defined so the amount of time needed to complete the project can be estimated.

The cost of most appraisals is directly dependent on the amount of time it takes to complete the valuation professionally. Many factors are considered to accurately define the scope of the appraisal.

Industry complexity

How complex is the industry and do comparable assets routinely trade on the open marketplace? For example, a machine shop constitutes a "straightforward" appraisal, and comparable market data for this industry is plentiful. Conversely, a chemical processing plant is complex. Comparable market data is scarce, and many factors will ultimately influence how process equipment of this type will actually be sold.

Purpose of the appraisal

Appraisals are engaged for all kinds of purposes. Most often in the asset-based lending industry the purpose of the appraisal is to estimate the Liquidation Value and/or Orderly Liquidation Value of the machinery. Both of these definitions assume the machinery is being sold under duress to be moved. When valuing a machine shop, these value definitions are common and applicable. Conversely, a chemical processing plant is best sold to remain in place and in operation. So while a value definition assuming the removal of the chemical processing equipment may be helpful to a lender in identifying the downside risk of the transaction, an appraisal that considers the business factors that would motivate a sale of the machinery to remain in use also presents a realistic, better case scenario. However, an appraisal that assumes a business valuation overlay such as this is more complicated and time consuming to perform and, as a result, more expensive.

Use of the appraisal

An appraisal used to obtain financing is more complicated and time consuming to perform than estimating the replacement cost of the same machinery for insurance purposes. As a result, a financing appraisal is more expensive. Appraisals used to support litigation require more intensive documentation, which results in a higher cost.

Effective date of the appraisal

Retrospective and prospective appraisals are more complicated and time consuming to perform than an appraisal that uses the current date as the effective date. Therefore, retrospective and prospective appraisals tend to be more costly.

Number of locations

More locations take longer to inspect than fewer locations due predominantly to lost efficiency and travel time. Thus, multiple location projects are usually more expensive than fewer locations.

Desktop versus inspection

Desktop appraisals do not require a physical inspection of the assets and, as a result, are less costly than appraisals requiring a full inspection. However, full inspections result in a more accurate appraisal.

Did you like this article? Click here to sign up for The AccuVal AdVisory™ or send us an e-mail with your comments at inquiry@accuval.net.

About AccuVal
AccuVal provides a broad range of valuation, advisory and asset management solutions that contribute to growth or help ensure survival. We appraise the business enterprise and shareholder equity; bonds; intangibles and intellectual property; machinery and equipment; inventory; real estate and accounts receivables in over 100 industries worldwide. Learn more at www.accuval.net.