An auction is a process of buying and selling goods or services by offering them up for bid, taking bids, and then selling the item to the highest bidder.
A business auction is a process of bringing buyers and sellers together for an experience that encourages the competitive nature of the bidders to help ensure sellers achieve true market value for their property.
Auctions are used to help settle estates and distribute proceeds to heirs quickly, convert assets to cash in the case of an event like retirement, to sell non-producing assets, and other purposes.
A no-reserve auction or absolute auction is when the item for sale will be sold regardless of price.
A reserve auction is when the item for sale may not be sold if the final bid is not high enough to satisfy the seller. That is, the seller reserves the right to accept or reject the highest bid.
An auction creates a market and defines a price.
Auction items are sold “as is,” where is, with all faults. Auctions provide no warranties or representations of merchantability, of fitness, nor of any other kind, express or implied.
For example, items may or may not be available for examination prior to bidding, and yet bidders must acknowledge they have examined the items fully or chosen not to examine them.
Similarly, the auctioneer’s opinions should in no way be construed as a guarantee of any kind as to age, condition, materials, or any other feature of items being sold. Auctions do not give refunds; all sales are final. So, buyers must bid in confidence on an “as is” item that can’t be returned.
The practice of protecting themselves in case of any dispute is a good thing for auctions to do for a number of reasons. One is expectation.
To illustrate, car wash A is one of three income-producing properties being auctioned. The owners, a family, are selling all three as leaseback so they can concentrate on operating the individual businesses.
The agency conducting the auction describes it as a way to define value through competitive bidding for extraordinary properties and seal a deal faster than more traditional real estate purchases while offering a potentially attractive deal for buyers.
Car wash A was advertised as selling without reserve subject to a minimum bid of $3.8 million. This would be an income multiple of 3.3 based on reported sales of $1.152 million.
At that time, the equation to test the value of this type of wash was 6.0 times EBITDA or $2.073 million based on gross net of 30 percent. Note the $1.7 million difference between minimum bid and prevailing school of thought on opinion of value.
Another reason auctions protect themselves is diversity of items and range of conditions and values that can make it difficult to explain to a buyer just what it is they’re getting.
For example, car wash B is being auctioned with a reserve. Included in the sale are building, equipment, and leasehold improvements. There is a long-term land lease with renewable options. The reserve is $150,000 and sales are $100,000.
The equation to test the value of this type of wash would be sales times 2.0 or $200,000. Note the slim margin between minimum bid and school of thought on business-only value.
In the final analysis, the purpose of an auction is to create a market and define a price at which a business will exchange hands. Auctions only facilitate this process.
So, “as is” means that new owners should have the resources and commitment to acquire and grow the business, accomplish due diligence to support a purchase decision, and consider attributes and benefits that may or may not be realizable.
Bob Roman is president of RJR Enterprises – Consulting Services (www.carwashplan.com). You can reach Bob via e-mail at firstname.lastname@example.org.