Buyers Premium

Journal Issue

Oct 1999

Column Name

Value & Cents

Journal HTML Content

<p>Although now well established, buyer's premium fees are still relatively new and their impact

on recovery in liquidation sales must be measured. When estates are liquidated in bankruptcy,

are they being affected in a positive or negative way by this new fee structure? There have been

no statistical studies, but there have been estimates by auctioneers and buyers that may be of

interest.

</p><h3>What Is It?</h3>

<p>The "buyer's premium" was initially used in the Netherlands and has been used throughout

Europe for many years. Simply stated, it is adding the sales commission as an obligation to the

buyer after the bid. For example, if the bid is $100 and the buyer's premium is 10 percent,

the invoice to the buyer would be $110. In the United States, auctions traditionally consist of

the bidding, followed by the payment of the full amount of the high bid by the successful buyer.

The proceeds realized by the seller would be the full amount of the high bid less a deduction for

the fees for the sale. For example, if $100 was the highest bid, it would be paid by the buyer,

and assuming a 10 percent fee, $90 would be paid to the seller. In both methods (fees deducted

or buyer's premium added), any expenses would typically be deducted from the proceeds of the

sale.

</p><h3>Buyer's Premium Strategy</h3>

<p>One might consider a buyer's premium somewhat of a gimmick, and in some ways, it is. How

often have we seen an advertisement stating that if you buy a certain amount of product or

service, you will be given other things? Even though logic says no one gives anything away,

buyers sometimes fall for that type of gimmick. There is a strategy used by many retailers of

marking items that do not sell at the original expected price to a higher price. Then the retailer

marks down the product to the same price at which it was originally priced but at which it

would not sell. In some cases, the items start selling because of an imagined discount that is not

real. There are many examples of this in U.S. marketing that seem to work, and this is certainly

one reason that the buyer's premium has worked so well.

</p><h3>Effect on Recovery</h3>

<p>The U.S. auction market is in an excellent position to measure the effect of buyer's premium on

sales. For many years, industrial auctions were based on straight commission without the

addition of buyers' premium. In the last few years, most sales have been held with buyer's

premiums, and a comparison can be made to recovery with and without the buyer's premium

fees, subject to some adjustments for inflation. Most believe that it is reasonable for the

following to occur when comparing sales with and without buyer's premium:

</p><ul>

<li>5 percent = no effect

</li><li>7 or 7.5 percent = 1 percent to no effect

</li><li>10 percent = 2 to 3 percent (Note: some argue 0 percent and others 5 percent)

</li><li>Greater than 10 percent = Typically not recommended

</li></ul>

<h3>Auctioneer Fee Strategy</h3>

<p>For many years, auction guarantees were very popular. Auctioneers would, of course, charge

additional fees for those risks. There were some strategies with these guarantees that caused a

seller to accept one auctioneer over another. However, in many cases, that may not have been

the best decision when considering the highest net result to the estate. Reputable auctioneers

could negotiate a fair fee without additional points added for risk and, in most cases, this would

result in a higher net result to the estate. Now that buyers' premiums have become acceptable,

there are various strategies used by auctioneers. For example, auctioneers may say that they

will conduct the sale at no cost to the seller and will simply add in a percentage (buyer's

premium), which will be their fee. However, in most of these negotiations, expenses for

advertising, promotion, set-up and evaluation of the items to the appropriate buyers, including

all related travel expenses, are deducted from the proceeds. There are some auctioneers who say

that a portion of the buyer's premium will be returned to the estate. This results in other

alterations of the sale agreement, such as a percentage of expenses being the responsibility of

the estate.

</p><p>In multi-million dollar auctions, auctioneers may negotiate a buyer's premium and absorb 100

percent of the expenses. The seller must be careful that the buyer's premium is not excessive,

thereby adversely affecting the net result. Some types of sales are more sensitive to buyer's

premium percentages than others. The earlier discussion of the effects of a buyer's premium

shows the results on average, which may change depending upon the types of assets and/or sale

locations. If at all possible, engage an independent evaluator who is familiar with these types of

sales and who has some advice on the strategy for fees and expenses that would allow the highest

<i>net results</i>.

</p><p>The seller must be careful on expenses. Too little may be to the disadvantage of the gross sale,

and too much may be a disadvantage to the net result. There are times when a 5 percent buyer's

premium is reasonable and other times when 10 percent would be reasonable. There are some

very difficult sales in which a combination of a buyer's premium sale and additional fee should

be paid by the estate. To obtain the good services of a reputable auctioneer, this would be a sale

in which a portion of the fee is paid by the buyers and a portion by the sellers so that the

buyer's bids are not affected by the higher fee percentage that is warranted. Sellers will be

approached with all types of buyer's premium liquidation proposals that may sound good on the

surface, but sellers must carefully analyze these proposals in terms of their effect on net

realization.

</p><h3>Recent Sales</h3>

<p>An auction was recently held outside of Houston in which the assets were live plants consisting

of trees, shrubs and ground cover, as well as related nursery equipment. A 10 percent buyer's

premium was made a part of the sale, but the expenses came out of gross proceeds so that the

seller received the bid price minus the expenses. I attended this sale, and in my opinion, the bid

amounts were affected very little by the 10 percent buyer's premium. It was estimated that

approximately -2 to -3 percent may have been an overall gross effect, but this would be a

difficult estimate to defend. Many of the plants brought in more than would be expected, and

others brought in less. One must consider the average when looking at the effects of buyer's

premium. There were more than 150 buyers, and with the heat at 105 degrees and no wind, it

was almost unbearable if you stayed the entire day. The sale lasted from 10:00 am until 8:45

pm, with approximately 20 to 30 lots being sold in darkness and 30 to 40 bidders still there. It

is very rare to see a nursery inventory sold at auction. Properly handled, such an auction is a

good thing because it cuts off the care expenses while gaining the highest net result by auction.

Certainly, there is an incentive to sell those types of asset as a total unit in order to cut

expenses. However, there may be a price paid, through a heavy discount. An auction can be the

best choice.

</p><h3>Conclusion</h3>

<p>It might be well to discuss the assets of estates with both liquidators and appraisers to evaluate

proper strategies, waiting periods, advertising, fees, etc. Surprisingly, many sales are now

conducted by sealed bid. There was an extremely successful sale of real estate sold by sealed bid

in which eight out of 10 properties were sold at acceptable or higher-than-anticipated prices.

</p><p>Caution is advised when receiving advice from consultants who could have a vested interest. The

seller should always look toward the highest net result, rather than the largest gross liquidation

number. Obviously, the seller will always wish to sell assets as a going operation. In most cases,

after a bankruptcy has occurred, the potential buyers for the unit or business would be known

prior to or shortly after the bankruptcy filing. Bankruptcy tends to stimulate interested buyers

to make inquiries and offers. Most of the competition knows the economic state of the subject and

there is not much that could occur after the fact to bring these people forward. If there have not

been any inquiries shortly after the filing, generally there will be few offers greater than the

piecemeal liquidation numbers that could be achieved through a liquidation sale. In a few cases,

the mere advertising of selling at liquidation may bring some hold-outs forward, but this very

seldom happens.

</p><p>The use of a "buyer's premium" has raised the results at some open auction liquidations. It is

very difficult to use this fee method in liquidations using sealed bids or orderly negotiations as

the buyers have time to adjust the premiums out of their offers. This is less likely to occur in

open competitive bidding, with its inherent faster pace. Trustees, creditors' committees,

liquidations through arrangements, etc. should consider fair fees and expenses appropriate to

the type of sale being conducted in order to have the very best liquidator possible and the highest

net results. Negotiations for the lowest fee or expenses may not provide the highest net result.

</p><hr>

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Journal Authors

Leslie H. Miles

Journal Date

Friday, October 1, 1999 - 12:00