Auction Contracts

The document by which your auction will be conducted is called the Auction Contract. This contract will determine the costs associated with conducting an auction and the terms by which the auction will be conducted. There are several types of commission structures that may be documented in the Auction Contract. There are also many different terms for conducting an auction that are specific to each Seller’s situation that are detailed in the contract.

A properly written and executed auction contract is the first step in conducting a successful auction. Auction contracts are usually very clear and simple, and usually answer a lot of questions that a Seller may have. The purpose of the contract is to clearly outline expectations and responsibilities of each party which ensure a successful auction for all involved parties.

The following are some examples and descriptions of costs and terms that you may find in an auction contract.

Costs

1. Commission

Most auction companies will be paid based on a percentage of the Gross Auction Proceeds. This percentage is a negotiated compensation between the Seller and the Auction Company. Seller’s typically prefer this method because the auctioneer’s pay is determined by the success of the auction. The higher the auction gross, the higher the commission paid.

A Buyers Premium (BP) is sometimes added to a commission structure. A Buyers Premium is a commission percentage charged to the buyer, in addition to the bid price. For example, in an auction with a 10% BP an item with a final bid price of $100 will actually cost the buyer $110. Buyer’s Premium is also a negotiated commission between the Seller and the Auction Company. Some Seller’s prefer to pass a portion of the commission along to the Buyer through the application of a Buyer’s Premium in an effort to reduce their own costs.

A third method of commission is flat fee. In this method the auction company has determined a flat fee they will charge for conducting the auction. This may be used in a situation where the auctioneer is not confident in the auction’s success and wants to make sure they achieve a minimum amount of payment.

Commissions can be one of the above three, or a combination of all. It’s important to remember that a lower commission may not equate to a higher return to the Seller. For example, an auction company who achieves a $100,000 Gross Auction while charging a 20% commission is actually a better value to the client than an auction company who charges a 10% commission while only achieving an $80,000 Gross Auction.

Some factors to consider when interviewing prospective auction companies are website content, social media presence, referrals, affiliations with professional associations and professional designations. All of these factors can help you determine whether the auction company is at the forefront of today’s marketing concepts and able to deliver your asset to the largest selection of interested buyers.

2. Marketing

Some auction companies will include marketing costs in their commission structure, and some will itemize it separately. Auction contracts usually indicate an anticipated budget for marketing. Most auction companies will deliver a detailed list of marketing expenses at the conclusion of the auction, or while the marketing is being conducted. Marketing costs can include signage, fliers, print advertising, social media boosts, Google ads, online targeted marketing, radio or television spots, drone footage, etc. Not all marketing is the same and it’s no longer acceptable to just place a local ad and drop off a flier at the local restaurant. Our buyers are searching for specific items and if marketed properly will bid from around the country. If your assets are not marketed to a properly targeted demographic of buyer, you may be missing out on a large portion of return.

3. Labor

All auctions incur labor, whether during set up, load out, clerking or cashiering. Some auction companies will include anticipated labor into their commission, while others will itemize this cost per employee, per hour worked. Sellers have various preferences regarding how labor is charged. Seller’s can reduce labor cost by conducting any portion of the auction set up or load out. This is often the largest part of labor for any auction. The auction contract will often include an estimated amount of hours, and a set rate per hour, per employee.

4. Restroom / Venue

Depending on Seller circumstances, some auctions must be held off-site where a venue must be rented. (See bullet point # 2 under “terms”) Other situations dictate that a tent is rented, or a port-a-john provided for the auction site. These costs are often added to the Seller’s Statement as itemized deductions from the Auction Gross.

Terms

1. Absolute or Reserve Auction

Sellers must determine whether they desire their auction to be Absolute or Reserve. An Absolute Auction means that all items will be sold to the highest bidder, without exception. A Reserve Auction means that some or all items are price protected and all items will sell upon owner confirmation. The Seller may determine not to sell an item once the high bid is achieved. An Absolute Auction often offers a higher possibility for return by optimizing buyer interest. An Absolute Auction also offers the lowest level of Seller protection. A Reserve Auction offers more protection for the Seller, but can limit the amount of Buyer interest which subsequently affects the amount of competition. Items with reserves are often included into the auction contract, with the amount of reserve the seller is willing to accept.

2. Timeline and Location

Each auction has a timeline determined by Seller circumstances. Some timelines may be accelerated or delayed due to a court order, or sale of real estate. Auctions typically take a minimum of 21 to 30 days to adequately market and set-up, while others require extended marketing timeline due to unique characteristics of the asset (s). The auction contract should list the dates and times that the auction is anticipated to occur.

The auction location can be determined by numerous factors including parking, weather, local zoning and property dimensions. It is usually advantageous to conduct the auction “on-site” meaning, where the asset currently resides. Having an “on-site” auction reduces the cost and labor incurred in moving items to a new location. When an “on-site” auction is not possible, the contract should include language that covers the costs of moving, as well as the cost of a new venue.

3. Items to be Sold

An auctioneer makes many determinations about an auction based on the assets being offered. The auction contract should include a list of the items to be included in the auction, along with a clause for recourse if an item is removed from the auction. It is disadvantageous for a Seller to remove an item from the auction. Most auction companies will have a clause in their contract that prohibits such actions and allows for commission to be collected if the item is removed. The auctioneer may also reserve the right to determine the value of the item, regardless of the actual selling price.

A Seller who removes an item from the auction is usually concerned that the item “won’t bring what it’s worth.” The Seller feels they are protecting their asset by removing it from the auction and selling it through other means, often private treaty. What the Seller neglects to consider is that the item will most likely bring market value, and also increase the bidding on other items within the auction. If an asset attracts several bidders, those bidders will also bid on other items and raise the bids across the board. If the Buyer is told the item is no longer in the auction, they are less likely to support the auction through active bidding.