Into the Unknown

We often appraise liquidation values for machinery and equipment (M&E) assets. In recent years, most small business owners and lenders have seen this as a formality: liquidation did not seem possible.

Unfortunately, many business owners are thinking seriously about liquidation and auctions for the first time in a decade. Lenders are re-reading recent M&E appraisals to determine their worst-case scenario.

They are wondering just what, exactly, they are walking into. For the uninitiated, auctions can be intimidating and stressful.

I was previously an auctioneer and managed several small business liquidations; I now observe the industry daily as an M&E appraiser. Read on for high-level guidance on M&E auctions for small business owners and lenders.

What is an M&E auction?

An M&E auction is about the immediate transfer of all benefits and costs of asset ownership from a seller to a buyer. An auction minimizes risk for the seller and transfers risk to the buyer. This is contrary to a retail sale in which a seller accepts some risk in exchange for a higher selling price.

Auction buyers must purchase “as-is, where-is, with all faults”; they must pay for and remove purchases quickly; there are no returns, exchanges, or warranties. This generally results in prices far below the retail selling level.

Do not confuse M&E auctions with auctions for farmland, artwork, or estate personal property. At those types of auctions, some properties will be in high demand and sell for inflated prices, while other properties will be common and sell below retail.

By comparison, the vast majority of small business M&E is mass-produced and easily replaced. Nothing is "rare" or "collectible."

M&E auction buyers – mostly competitors, dealers, and scrappers – have no emotional connection to the assets. There is little chance that you will see thrilling bid sequences which result in retail-level values.

(There are, of course, exceptions. But don't count on them - even the auctioneer usually doesn't know which items will be in demand until the auction begins.)

Whom should I hire to conduct the auction?

Small shop = Local / generalist: If you are liquidating a common small business with low-value assets – perhaps a diner, salon, main street retailer, or residential contractor – then you should be well-served by local auction firms. These firms usually sell everything from real estate to furniture to small business assets. They operate efficiently and they know the local marketplace.

Big shop = Regional / commercial: If you are liquidating larger and more valuable assets – perhaps a machine shop, print shop, food processing facility, or assembly and distribution facility – then you should use commercial liquidation firms. These firms operate regionally. They have the resources and reputation to maximize buyer engagement for large M&E assets.

Dozers, combines, or semis = Specialist: If you are liquidating construction machinery, farm machinery, or transportation assets, you should use auction firms which specialize in those marketplaces.

Will the auction be online or on-site?

Regardless of the type or size of the assets, you must engage a firm which will offer simulcast or online-only bidding. Period.

In 2020, professional M&E dealers are not going to attend your auction in person when they can attend competing auctions from their office. This was already the case pre-COVID, and it is now cemented as common practice.

You may have a long and trusting relationship with a reputable local liquidator - but if they are hesitant or inexperienced with online bidding, then they are stuck in the past and are not serving you well.

Is there anything I can do before I call a liquidator?

Here are five common-sense action items which can smooth the road ahead:

1. Landlords do not like having auctions on their property. They fear scrappers ripping out copper, buyers leaving ruts in the lawn, and auctioneers hanging embarrassing signs.

Every auctioneer has a story about showing up on auction day to find the locks have been changed. You must involve the landlord from the very beginning of the process.

2. Clean up your shop. This may seem obvious, but it is often forgotten in the rush of emotion that comes with closing a business. A day of elbow grease from the business owner can go a long way toward increasing net returns.

Auction firms will bid more competitively for the right to advertise bright and shiny machinery. Buyers will perceive less risk when bidding on machinery from a clean facility.

3. Along those same lines: organize the machine accessories and information. Put maintenance histories, original purchase files, and spare parts with each machine. This is easy for the business owner who knows where everything belongs, but is a major hassle for an outsider.

As with cleaning up the shop, it makes the auction and the assets more attractive for both the liquidator and the buyers.

4. Every auctioneer has a story about having to remove the most valuable assets the day before an auction. The bank’s attorney should have the UCC filing search completed to ensure there are no competing claims against the assets.

If key items have to be removed late in the process, the relationship between the seller and the auctioneer could turn sour. Buyers may abandon the auction if they see M&E being pulled after being advertised.

5. Both the business owner and the lender must prepare themselves emotionally. Small business owners are used to controlling every aspect of their business; auctions are about surrendering control to the marketplace.

Once you have selected a liquidator and approved a liquidation plan, you will have to back off, let them do their job, and accept whatever the returns may be. If you’re not psychologically ready for that, don’t start the process.

How do I choose between liquidation proposals?

You get what you pay for and you must compare apples to apples...don’t automatically choose the lowest commission! A properly-conducted liquidation can mitigate financial and reputational damage to the business owner and lender.

Don’t hesitate to quiz the auction manager. Where are they going to spend your marketing dollars? Which items will be itemized and which will be grouped? What happens if a buyer doesn’t pay? If their responses are sensible and professional, you will feel much better as the auction progresses.

On the other hand, if all they can tell you is a commission and marketing fee, then you have no idea what is going to happen and you have no way to hold them accountable. You will be a nervous wreck waiting for the results.

Review the liquidator’s recent sale bills and online listings for professionalism and clarity of presentation. Ask a machinery dealer, workout banker, or bankruptcy attorney for their advice – they interact with auctioneers regularly. If you can, attend one of their auctions – How are the employees dressed? How do they treat buyers?

What if I still need help?

Call us. We are happy to recommend liquidation firms. We also formally advise professionals who aren’t comfortable with machinery liquidations in requesting proposals and selecting liquidators. We understand the fear of liquidation, and we can provide independent third-party input to help mitigate your risk and reduce your stress.

Tim Roy, ASA, Senior M&E Appraiser

Capitale Analytics

[email protected]