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Why Auctions Work for Maximizing the Value of Assets

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Scott A. Chernich, Patricia J. Scott and Co-Author Doug Sheridan, CAI
Foster Swift Agricultural Law News
October 31, 2019

A property called “The Mountain,” a 157-acre property in Beverly Hills, California, was listed for sale last year for a whopping $1 billion. In August of 2019, having drawn little interest from buyers, the property was sold at a foreclosure auction for a mere $100,000. The winning bid was a credit bid from a creditor who apparently has liens on the property totaling $200 million.

It’s impossible to know for sure, but consider what may have happened if this calamity of a sale process had been conducted differently. Rather than starting with a traditional sale listing that, by all accounts, priced the property astronomically above its fair market value, imagine if the seller began with an auction sale process—as opposed to being forced into one through foreclosure.

Instead of scaring off most potential buyers (at least those not named Bezos or Zuckerberg) with a $1 billion price tag, an effectively marketed auction could have created a market-driven process leading to robust interest in and bidding for the property.

There’s no guarantee that it would have sold for more than the debt at auction, but there would be little doubt following the process that the property was fairly assessed by the marketplace.

Auctions are the Fairest and Best Way to Sell Assets for What They’re Worth

In many different types of legal matters, lawyers are called upon to help clients in situations where it’s necessary to sell assets. A client may be looking to wind down a business, fund taxes due in connection with an estate, or monetize assets to satisfy a lender in a distress scenario. An auction is a great way to realize the fair market value of assets in these and other situations.

Let’s start by addressing some of the reasons why auctions are effective for sellers of all types of assets.

1. Open, Fair, and Transparent Process. One of the reasons that the traditional sale process for “The Mountain” failed so miserably is that it was, by design, an exclusive process. The $1 billion price tag generated lots of public relations buzz, but no legitimate buyer interest. An auction on the other hand, is an open and transparent process. The assets for sale are available for all to see. There are no barriers to entry for prospective buyers to overcome. The price of an asset at auction starts low and ends high. Robust competition is encouraged.

2. Buyer and Seller Walk Away with Confidence. A common cliché of negotiating is you know that a good deal has been struck when both parties walk away from the table dissatisfied. However, mutual dissatisfaction doesn’t need to be the outcome. Because of the transparent process inherent in an auction, in which parties openly bid up the price of an asset in predetermined increments, both buyer and seller can have confidence that the asset transferred hands at a fair market price.

3. Auctions Work in Both Down and Up Markets. While it’s been a decade since the depths of the “Great Recession,” the chaos of that period—including a rash of foreclosure auctions—is still fresh in people’s minds.

That is one of the reasons why many perceive an auction as a tool best utilized in a downward trending market. And it’s true that auctions work extremely well as a means to quickly determine the value of and monetize assets, particularly for financial institutions in distressed lending situations. However, an auction can work just as well—even better—in an upward trending market.

In addition to securing fair prices for assets, auctions can help avoid: (i) a long, drawn out negotiation process, (ii) arbitrary, ineffectual list pricing (often too high) that has the effect of tamping down bidding and/or causing sellers to bid against themselves.

How to Make the Most of an Auction

While an auction can work extraordinarily well to fetch fair market value for an asset, not all auctions are created equal. To conduct a successful auction process, it’s important to have a skilled, experienced auctioneer involved. In particular, an auctioneer’s job is to create a robust, competitive marketplace for the assets being sold.

Think about it. The reason well-known auction-based platforms, such as the New York Stock Exchange and the Chicago Mercantile Exchange, work so well is that they have lots of buyers and sellers for the assets whose values are being bid up or down. Unlike those platforms, however, most private auctions don’t have built-in market demand. Demand must be generated, which is accomplished through strategic planning, implementation of technology, and the marketing prowess of the auctioneer.

Unlike the auctions of old, most successful auctions these days take place online. Online auctions have the obvious benefit of not being constrained by geographic boundaries. They also can take place over the course of weeks, rather than a single afternoon, which facilitates more bidding for an asset. In the experience of Sheridan Realty & Auction Company, which conducts the great majority of its auctions online, the difference in the amount of people who participate in an online auction versus an in-person one is significant. While 100-300 people may show up for a live auction, 10,000-25,000 typically view an online proceeding.

Demand is generated through a mix of new and traditional marketing techniques. Digital ads and email databases are used to reach broad audiences. Direct mail and advertising in targeted trade journals—often overlooked as “old school” tactics—can also work remarkably well.

Perhaps most important, an auctioneer must have (or acquire) a thorough understanding of the asset being sold and the types of people, businesses, and industries it might appeal to. It doesn’t matter how broadly an auctioneer markets an asset. If its availability is not marketed to the right audience, then it stands little chance of selling for the highest price possible.

For example, when Sheridan Realty & Auction Company was hired to sell a specialized piece of farming equipment relevant only to onion farmers, it was critical for the auction company to learn everything it could about the onion business.

Because of the niche nature of the industry, it was necessary to market the equipment worldwide—in a much tailored, targeted way—to create a market. What resulted was a competitive bidding process between prospective buyers in New York and New Zealand, and the equipment ultimately sold for twice the price the seller expected.

The point is, every asset, and therefore every auction, is different. The right strategy to get the best price for an asset is dependent upon many different factors, and it’s only through lessons learned through experience that an auctioneer can know what levers to pull to drive up demand.

When You Have an Asset to Sell, Consider an Auction

As lawyers, our job is to help our clients solve problems, and auctions are often an effective tool for doing so. Because of the open, fair, and transparent process that auctions operate under, we’re confident that our clients—from financial institutions to family farmers—will, themselves, have confidence in the result.

Auctions are not the only way to test market value, but in our experience they serve as the most accurate and quickest form of price discovery for almost any asset. If you’re getting ready to sell, it’s a financial tool worth considering.

If you have questions about the auction process and how auctions can be beneficial to your specific situation, contact Doug Sheridan at (517) 676-9800 or at doug@sheridanauctionservice.com. If you would like to craft a legal strategy based on your needs, contact Scott Chernich at (517) 371-8133 or at schernich@fosterswift.com or Patricia Scott at (517) 371-8132 or at pscott@fosterswift.com.