Used equipment for sale: what’s the right price?
Written by Scott Macknocher, industry professional with 25 years of related technical, operational and management experience.
What is the right price for used equipment in the marine, energy and construction industries? Ultimately it’s what a buyer is willing to pay coupled with what a seller is willing to accept; match the two and you have a deal!
However in the world of industrial equipment things can get a bit more complicated.
Table of content:
Introduction
Age & condition of equipment
Supporting documentation
Inspection & testing
Transaction price
Financial valuation
Accounting value & depreciation
The role of brokers and other intermediaries
Thoughts and conclusions
1.Introduction
One question we are regularly asked at Dockstr relates to the pricing of used equipment for sale. Without a well-established secondary market, sellers are unsure of what price to ask for equipment and buyers are concerned they will over-pay. We discuss this subject regularly with our users who want our opinion as operators of an industrial marketplace.
In reality, it depends on whether the item being sold is a standard product such as a mini excavator or if it’s something more bespoke such as an underwater diving system. For standard products like dump trucks there will be a well established market for used items and conversely, for more unique, heavy equipment such as a drilling BOP there won’t be the same volume of transactions and therefore pricing will be more difficult. Indeed, the pricing of such items can be as much an art as it is a science.
Consequently, we have tried, in this article, to examine some of the key drivers for pricing in the secondary market. We set out the specifics of the market today and what considerations both buyers and sellers should take into account when participating in the used
2. Age & condition of equipment
Of course, before making any meaningful consideration about a piece of equipment, a buyer will want to have a good indication of its age, condition and original manufacturer.
It goes without saying that equipment from established original equipment manufacturers (OEMs) such as Caterpillar, Volvo or Liebherr will attract more interest than less well known brands. And without being able to quickly assess the opportunity, a buyer is unlikely to proceed further than making a very preliminary enquiry. They will want to know when it was built, by who and to what specification or standard. And what is its current condition? Has it been used extensively or is it unused, well preserved and still in its original packaging?
Such information can be totally factual with, for example, the number of running hours for a diving decompression chamber or an articulated lorry but conversely, this may be less easy to describe, for instance, for a piece of construction equipment such as winch or a crane.
“Building credibility between the transacting parties is crucial. If a seller cannot provide the most basic information about the item they are selling then the buyer will quickly lose interest.”
Dockstr tip
3. Supporting documentation
Once a buyer is satisfied that the equipment in question is worth pursuing they will want to see documented evidence that sets out the history of the item being sold.
By way of a primary assessment and before progressing to undertake a physical inspection of the equipment, a buyer will want to view the available supporting documentation. This may include original manufacturers manuals, maintenance records and current certification of compliance with applicable standards. Comprehensive supporting information at this stage allows the buyer to form a good idea of the condition of an item simply by understanding how it has been maintained and if certification records are up to date.
Generally speaking, good supporting documentation will speed up the transaction process and mean that fewer questions will arise as the process moves towards a deal. In contrast, having little or no documentation will have a negative impact on the price as buyers will consider any potential deal to be on an ‘as-seen’ basis with offers to buy being little more than ‘scrap value’.
“Without supporting documentation, any deal is likely to be considered on an “as-seen basis” and a buyer's offer may be little more than the scrap value of an item.”
Dockstr tip
4. Inspection and testing
Assuming a buyer has got to the point where they have sufficient interest to start to commit cost to a potential transaction, they will want to inspect the item in question. At this point the seller can have confidence that the buyer is serious enough to start spending money and in turn they (the seller) must be ready to react appropriately.
In terms of inspection, a buyer has various options available. Depending on their competence, the complexity of the equipment and the value involved, a buyer may elect to directly perform an inspection or they can employ an independent inspector. And if the value or importance of the equipment justifies it, a buyer may decide to engage with the original equipment manufacturer (OEM) to perform a detailed inspection and evaluation.
The result of an inspection will be critical to keeping any deal on track and will start to crystalise the opportunity for the buyer, particularly in terms of the price they are willing to pay.
“For a seller, having a buyer commit to an inspection confirms genuine interest and this should be facilitated as much as possible?”
Dockstr tip
5. Transaction price
Ultimately, the price a buyer is willing to pay versus the price a seller is willing to accept will determine whether or not a transaction can be concluded. And in the world of the secondary equipment market, price usually becomes the determining factor to success. So what is the right price for a particular piece of equipment?
No matter where in the world you are, you probably have access to a car buying website where you can view cars by make, model, specification and use. Today, cars are practically a commodity where a well-defined secondary market exists. As a result you can easily find the market value of a particular car without too much effort. And whilst this may be the case for used plant such as tractors or bulldozers, this is not the case for bespoke industrial or heavy equipment such as a subsea ROV or drilling rig.
That said, pricing will always come down to supply versus demand. If there’s demand for what you are selling then you’ll achieve a good price and if there isn’t you won’t. It’s really that simple. But to a seller, this doesn’t mean that you need lots of buyers competing against each other. It may help, but it’s not essential. You just need one buyer who NEEDS your equipment.
Take the example of a ship owner having a vessel employed on a critical contract with heavy penalties for non-compliance. In the event of the failure of a critical component, the owner may be willing to pay a premium price for a replacement part, particularly where a spare does not exist and where the lead-time for purchasing a new replacement is weeks or maybe months. In this case, the buyer may be willing to pay a premium price to secure a replacement item.
“Market values don’t always exist in the world of secondary industrial equipment. The selling price therefore becomes what the buyer is willing to pay and that will depend on the circumstances involved.”
Dockstr tip
6. Financial valuation
Ok, so there may not be an established secondary market for many types of equipment but that doesn’t mean you can’t arrive at a fair valuation for a piece of equipment when needed. And when dealing with high-value items this is obviously an important factor for both sellers and buyers.
One popular way of valuing equipment and assets is to undertake a financial valuation using a discounted cash flow (DCF) analysis or methodology. Such an approach tends to be used by financial professionals for larger equipment, facilities or businesses and involves estimating future cash flows that are likely to be generated by the item or business. Indeed this approach is often used by accountants to reset the accounting value of Plant, Property, and Equipment sitting on the balance sheet of a company.
Setting the value of an item before trying to sell it is an important exercise. It helps set expectations on both sides and our experience shows that priced items usually generate greater and more credible interest than those simply open to ‘offers’ or ‘enquiries’. Unfortunately sellers sometimes have wholly unrealistic expectations of what a buyer will pay for an item however such expectations can be artificially driven by accounting principles as we cover in the next section.
“Having an upfront price expectation is important for both sellers and buyers. And for high-value items it can be worth engaging with a professional who can advise on realistic valuations using accepted financial methodologies.”
Dockstr tip
7. Accounting value & deprecation
When pre-owned equipment is being sold by its owner, it’s helpful to have an understanding of the accounting principles at play as these may constrain the seller in terms of the price they are willing to accept.
Equipment is often purchased as a capital expenditure and depreciated over the life of the asset; typically from 3 to 15 years. Every year the owner will depreciate a portion of the acquisition price and retain the residual value on it’s balance sheet. This is the accounting value of the item and whilst accounting principles strive to reflect the real-life value of an item, the reality is often very different.
This is because accounting depreciation, no matter how sophisticated (and usually it is highly unsophisticated), can never reflect the achievable market value of a piece of equipment. Therefore, the accounting value should not be considered a reliable indicator of the achievable selling price on the open market, for the reasons set out earlier in this piece.
However whilst this appears clear, sellers often take the accounting value as their first reference when setting the asking price for an item, not least because it meets the theoretical accounting needs of the business. And because of this, any sale below this theoretical value will result in a loss when the item is sold (on paper at least) and this can create an impenetrable barrier to achieving a sale if the seller is not willing or able to accept the accounting loss which will arise.
“Accounting principles can create real challenges to successfully concluding a sales and purchase transaction. It is therefore important that both parties understand such constraints and are willing to work around them where possible.”
Dockstr tip
8. The role of brokers and other intermediaries
Historically the secondary market has been one where some level of intermediary has been required.
Typically this has involved brokers who have facilitated large-scale transactions in return for a commission, paid by either the buyer, the seller, or in some cases both. And the role of brokers can range from highly sophisticated organisations enabling multi-million dollar acquisitions to individuals introducing a buyer to a seller and performing no other service.
But for smaller items, where the commission available is small, sellers have had to rely on niche, local or regional brokers or re-sellers whose reach may be limited which in turn may limit the sales price.
A further complexity of this somewhat disjointed part of the market is the exclusive (or not) agreement between the broker and the seller or buyer. Where exclusivity exists, the party employing the broker relies on the reach and quality of the broker network and ultimately their ability to find a buyer or seller. But conversely, where an agreement is not exclusive and there may be multiple parties performing the role of broker, this can quickly degenerate into a free-for-all.
For example, in cases where multiple brokers are searching for a specific piece of equipment, a seller may receive multiple requests from different brokers who are representing the same buyer. As a result, the seller perceives a sudden surge in interest in their equipment despite the fact that there is only one end-buyer (but multiple middle-parties). The seller in turn becomes buoyant due to the increased interest and their price expectation rises accordingly, sometimes beyond that of the end-buyer thereby scuppering any possible deal.
But that said, a good broker can create immense value by ensuring that the process is run professionally whilst securing a quality buyer (or seller) and by negotiating strongly in favour of the party they represent.
“Use intermediaries with caution. Used well they can create value but getting it wrong can dilute value and create additional work.”
Dockstr tip
9. Thoughts and conclusions
The secondary market is diverse, with some parts enjoying high volume of transactions and therefore good liquidity and identifiable pricing whereas other parts are somewhat fragmented, with many local or regional parties playing highly niche roles.
In these less developed areas where ‘market values’ don’t exist, buyers and sellers don’t really know where to start when it comes to pricing. But the drive for sustainability and the need to cut costs will force more and more companies to embrace reuse and repurposing, providing of course the tools required to enable such behaviour exist.
A well-functioning secondary market depends on many factors however the ability for buyers and sellers to achieve a fair economic return is one of the critical foundations required. Being able to arrive at fair market values can be difficult given the pitfalls we have identified however if participating parties arm themselves with knowledge and understanding of the challenges involved then the chances of achieving success will dramatically increase.
This article has touched briefly on the issue of pricing of second hand equipment. If you’re interested in finding out more or are looking to dispose of surplus plant or inventory, you can contact us at contact@dockstr.com or register to our marketplace at www.dockstr.com/users/sign_up