Whats New in Inventory Sales at Auction
Three recent inventory sales held at auction provide some new insight into how to maximize returns in a non-bankruptcy environment. The sales were conducted by Plant Machinery Inc. (PMI), based in Houston. The sales were of aircraft parts inventory, nursery inventory and a large quantity of parts for a refinery. Most appraisals of inventories are requested to be conducted using the orderly liquidation concept. Usually, the orderly sale and/or sealed-bid type sales are more likely to produce a higher return for a lender. This higher expectation is due to the operation's assistance from personnel remaining with the company. All three of these sales had operations (owner or company) assistance, as the liquidations were not a result of a failure or bankruptcy, but for other reasons.
Not all auctioneers, dealers, liquidators or brokers have experience with inventories. Following is a review of the three sales, with a look at how the sale results were achieved.
Aircraft Parts. This sale was of an inventory that had changed dramatically since its last valuation study. Based on the adjustments for sales and new mix, PMI used the opinion of a well-respected appraisal firm with an aircraft background to measure the potential return at a sale. The lender needed to know what might happen at the sale, and the auction firm needed to have information on potential sale results and markets for the promotion. This "value added" (using the specialized appraisal firm) paid off as the promotion costs were kept in line with results, and the best markets were exposed. There were very good customers, and the resulting sale was very close to the opinion expressed and documented by the auction company. Does this mean that all appraisals can be this close regarding aircraft parts inventory appraisals? It is doubtful that there is any valuation methodology that can guarantee a close opinion to what can occur on a given day. The inventories are subject to such dramatic swings due to technology, economics, quantities, condition, timing and mix that accurately identifying value at auction or orderly compelled sale is difficult at best. An appraisal is an opinion of possible results based on historical indications and proven procedures. The newer and improved program needed a fair and reasonable test, and now there is this more recent one. Since that time, there was another sale held by a top aviation auctioneer that, again, could show the program methodology for aviation inventory as reasonably correct.
It is important to be on the inside of these sales to truly understand all of the "causes and effects."
Nursery Inventory. This sale was held outside of Houston on one of the hottest days of the summer. In more than 100 degree heat, bidders were moved from one lot to the other and buying in quantities suitable for users and dealers. Some of the users were architects, designers, home builders, landscapers and individuals building homes or making general improvements. Dealers were both wholesale and retail sellers of this same type of inventory. The attendance was more than anticipated, with more than 150 registered bidders to bid on about 900 lots. The sale lasted throughout the day with about 70 to 80 lots sold after dark. At the end of the day, approximately 50 bidders were still in attendance. The planning was such that the least significant items were in the last 200 lots. The advertising and set-up were successful based on the wonderful results. It is estimated that the sale resulted in about 70 to 80 cents or better on the grower's cost dollar. A walk-through was made of the home and garden departments of several Home Depot and Walmart Super Stores, and the auction sales were compared to those numbers posted on the auction sheets. In many cases, the sales were at or slightly below the store prices, although the average was in a 50 to 60 percent range. The experience provides insight as to proper promotion and how to recommend an exit strategy in that product category. Keys to success were keeping the nursery inventory in good condition, allowing ample time to hold the sale, what to anticipate for checkout and, most important, what the reasonable results could be of a sale of this type of inventory. It was learned that an auction can be good for nursery inventory, whereas in the past, one would have defaulted to a sealed bid and quick sale.
Refinery Inventory. This sale included fittings, large valves, pipe, specialty metals, motors, electrical components, pumps, welders and much more, all of which was in excess of the operational needs of the owners. The sale was totally outside and subject to the elements. The sale was just outside of New Orleans, and since there was a drought underway in much of the region, the weather was not expected to be much of a problem. A tent was erected and filled with chairs just in case of weather problems. An announcement was made at the beginning of the sale that the catalog should be used to make notes in the event they would need to sell from them if they experienced inclement weather. Naturally, the rain started about one quarter of the way through the sale. The auctioneer stayed with the auction, which was still being conducted outside from lot to lot. The sale had its difficult moments for bids as many of the items were simply not wanted for their intended uses. On the other hand, knowledgeable buyers in attendance bid well on much of the inventory. Prior to the start, employees overheard discussions between some registered buyers engaging in collusion in order to hold down the bidding. This was a problem that auction personnel had to deal with, and that would have had even more serious implications had the sale been in a bankruptcy context. The overall sale was as expected in dollars, even if less than anticipated on an itemized basis.
The various sales discussed above were unusual in category and method of sale. It is important to recognize that the experiences of sales must be used to establish value as well as exit strategies for other inventories, whether standard or special. It is important to be on the inside of these sales to truly understand all of the "causes and effects." These experiences will not automatically make an appraiser or a liquidator an expert on the crystal ball, but they add knowledge to that gained from traditional factors such as relationships to cost, the subject's sales or turns, and adjustments that must be made under the various sales scenarios, including bankruptcy conditions.