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“Is a site inspection required?”
It would be strange if this question didn’t emerge early in the process of a tangible asset and machinery and equipment valuation. Clients often anticipate that adding a site inspection to an appraisal’s scope of work will increase fees in terms of time required to execute the assignment and the cost of inspection site(s) travel. For both client and valuation partner, an early agreement and understanding of when a site inspection is required ensure surprises do not arise during the valuation, and the valuation professional’s report can be efficiently completed and delivered.
To provide complete transparency, we instead answer the question: “When does an M&E valuation need to include a site inspection?”
What is a Site Inspection?
According to the Uniform Standard of Professional Appraisal Practice (USPAP), a site inspection is “a physical observation performed to assist in identifying relevant property characteristics in a valuation service.” A site inspection allows the M&E valuation professional to observe the valuation characteristics of the subject asset.
Scenarios Requiring Site Inspections
On occasion, an M&E valuation professional can complete a desktop valuation without the benefit of a site inspection. While certain circumstances allow for an assessment sans site inspection, other scenarios require its completion.
Scenario 1: Valuation of Machinery & Equipment Without a Fixed Asset Register
M&E valuation professionals work with a company’s fixed asset register as a starting point in completing a valuation. A desktop appraisal is insufficient if a fixed asset register is unavailable because the appraiser must identify and build a fixed asset register based on the machinery and equipment inspected. This compiled list serves as a starting point in estimating the subject property’s value.
The completed list serves as the basis of a fixed asset register for our client’s advancing needs.
Scenario 2: Valuation of Machinery & Equipment With Allocated Costs
The second scenario arises when a fixed asset register is available but contains an allocated cost basis from previous acquisitions. In this case, VRC recommends a site inspection allowing our valuation professionals to complete a Direct Cost Model (DCM) and apply other necessary valuation techniques to supplement the data from the fixed asset register to arrive at a credible opinion of value.
In this scenario, the appraiser’s site inspection identifies the subject assets’ unique characteristics and physical attributes (such as condition and age). This information, combined with outside research and discussions with knowledgeable company staff, allows us to develop the estimates for Replacement Cost New necessary to complete a DCM. VRC leverages the DCM of an inspected location and industry comparison metrics for valuations with multiple locations to provide the DCM for a similar uninspected location(s).
Scenario 3: Valuation of Machinery & Equipment With Incomplete Data
The third scenario arises when a fixed asset register with a historical cost basis does not accurately reflect the on-site physical assets. There are numerous reasons for this discrepancy:
- Assets no longer in service are still on the fixed asset register (ghost assets).
- Older assets remain in service with a zero net book value basis but were previously removed from the fixed asset register.
- Multiple assets below the capitalization threshold but collectively have a higher cost basis.
- Changes in capitalization policies between the seller and the buyer.
- A fixed asset register has passed through multiple ownerships, rendering it potentially inaccurate.
While this scenario is harder to identify during the bidding phase of the valuation engagement, an experienced valuation professional should be able to diagnose this problem quickly. VRC’s recommended solution is conducting a site inspection using a DCM analysis to test the accuracy of the fixed asset ledger; this determines if an adjustment to the fixed asset register is required to arrive at a credible opinion of value.
As with scenario two, the site inspection allows the valuation professional to identify the subject assets and their unique characteristics and estimate Replacement Cost New to complete the DCM.
Benefits of M&E Valuation Expertise
While some M&E valuation engagements can be completed without conducting a site inspection, there are many instances where one is necessary to complete a credible machinery and equipment valuation.
- Project with more significant due diligence requirements.
- The specific scope of work requirements.
- Complex asset appraisals.
- Other unique client and/or asset specifications.
The three scenarios we highlight here are the most common that requires consideration of a site inspection. Audit challenges are also common with M&E valuation engagements, particularly with scenarios two and three, and clients benefit from leveraging VRC’s experience to pass internal and external audit reviews.
Seeking an M&E Partner
Our experience working with clients combines our long history of valuing a full range of M&E assets across a variety of industries with deep knowledge and expertise across varying scenarios and assumptions. We have completed thousands of engagements ranging from single location engagements to engagements of multi-thousand plus properties, including individual assignments exceeding $10 billion in value.
The VRC Team offers extensive, specialized valuation experience with industries such as renewable energy power, chemical and pharmaceutical plants, sawmills and paper mills, vehicle fleets, production and process equipment, steel mills, retail, medical operations, and other specialty and niche businesses.