absolute, auction, auctioneer, auctioneers, auctions, commission, conventional items, guarantee, guarantee and split, large equipment, limited use items, Limoges china, market value, minimum, risk, soil stabilizers, without reserve
We recently wrote about how auctioneers are paid. Now we wish to explore yet another method of an auctioneer working with a seller.
This arrangement is known as a “guarantee and split” auction.
In this type of agreement, the auctioneer guarantees an amount to be paid to a seller, either prior to the auction or following the auction. Any amounts over this guaranteed amount are split between the auctioneer and seller after the auction is complete.
As I found this described on an auctioneer’s website, it was noted that these types of auction arrangements:
- “Are very popular where the assets include one or more very valuable items that have very limited use. The guarantee covers the value of the conventional items and offers an incentive to the auctioneer to find a buyer for the limited use items.”
For instance, Harry owns an inventory of road repair and landscaping equipment, including several trucks, cranes, tractors, bulldozers, backhoes, and various tools and cabinets. Further, Harry owns two late model soil stabilizers which he hopes will demand at least $50,000 each. However, Harry has learned that these particular soil stabilizers are a width that is only used in limited scenarios since a law change in 2008.
The auctioneer discusses a “guarantee and split” auction plan with Harry. The auctioneer agrees to pay Harry a guarantee of $250,000 for all his road repair and landscaping equipment, and will split any amount in excess of $250,000 received. For instance, if the auction demands $300,000, Harry will receive $275,000 and the auctioneer will receive $25,000. Alternately, if the auction demands only $225,000, Harry will still receive $250,000 and the auctioneer will be out, at minimum, $25,000.
Harry believes that his equipment including the two soil stabilizers is worth probably $350,000 – $400,000 but likes the guarantee from the auctioneer for $250,000. In fact, Harry had talked to another auctioneer who wished to sell the equipment at auction, charging Harry 20% commission and about $15,000 in advertising expenses; in this scenario, if the auction demanded $350,000, Harry would net $265,000, but without any guarantee of any certain amount. In the guarantee and split plan, a $350,000 auction would result in Harry receiving $300,000 net.
A guarantee and split auction allows the seller and auctioneer to share the inherent risk of selling anything in any fashion — that the market will not meet seller expectations. The seller is guaranteed a certain minimum amount from the auction, and the auctioneer assumes the risk that the auction will produce that guaranteed total, but at the same time is richly rewarded if he can secure buyers and interest to exceed that minimum amount.
Guarantee and split auctions are not limited to large equipment.
Diane wishes to consign her late grandmother’s Limoges (96) piece china set. Diane believes the china set is worth as much as $5,000. The auctioneer Diane speaks to offers her two plans:
- He can sell the china with no minimum bid or reserve (absolute) for 30% commission.
- He can sell the china on a guarantee and split plan, with a guarantee of $3,000.
If Diane chooses the first plan (30% commission), and the china demands $5,000, she will net $3,500. In the guarantee and split plan, if the china demands $5,000, she will net $4,000. However, if the china demands only $2,500, she will receive the $3,000 guaranteed, where in the 30% commission plan, she would receive only $1,750.
However, sellers are guarded to the possibility that their item demands far in excess of the guarantee. For instance, if Diane’s Limoges china demands $25,000, the guarantee and split plan nets her $14,000, where the 30% commission plan would net her $17,500.
As the gross proceeds (in excess of the guarantee) increase, the guarantee and split plan approaches a 50% commission. For instance, if Diane’s Limoges china demands $300,000, the guarantee and split plan nets her $151,500 (49.5% commission) where the 30% commission plan would net her $210,000 (30% commission.)
The key to the guarantee and split auction plan for the seller is that the guarantee is “reasonable.” Certainly if the guarantee is at or less than market value, it is a good deal for the seller. However, the more the guarantee is unreasonably below market value, a commission-based plan becomes a better choice — so long as the commission-based plan is less than 50% commission.
Sellers should keep in mind that if the auctioneer is setting the guaranteed amount, there is motivation to set that minimum low for two reasons (and possibly a conflict of interest.) First, it lessens the risk of the auction not meeting or exceeding that number, and secondly increases the odds of the auctioneer earning adhesionary commissions. However, so long as the seller has completed due diligence on the likely value of the items under consideration, he can guard against lower than reasonable guarantees.
The guarantee and split auction offers sellers another choice in choosing how to sell at auction.
Mike Brandly, Auctioneer, CAI, AARE has been an auctioneer and certified appraiser for over 30 years. His company’s auctions are located at: Mike Brandly, Auctioneer, Keller Williams Auctions and Goodwill Columbus Car Auction. His Facebook page is: www.facebook.com/mbauctioneer. He serves as Adjunct Faculty at Columbus State Community College and is Executive Director of The Ohio Auction School.