Facing a triple-threat of erratic fuel prices, sky-high materials costs and a slowdown in business due to the unpredictable economy, many construction companies are looking for new ways to boost their bottom lines. As a partial solution, some are holding on to fleet equipment longer than planned, lengthening replacement cycles but at the same time incurring higher maintenance costs and reduced efficiency.
Aging and idle fleets don't have to be a drain on the bottom line. Given the slowdown in the economy and its impact on construction companies, converting idle assets to cash is a more sensible solution. Companies who understand this take on less risk in terms of available supply of later model assets, should the business improve quickly.
Many construction companies use traditional auction methods for disposing of idle or end-of-life assets. A number of "industrial eBays" have emerged in recent years to efficiently service the needs of complex industrial and commercial equipment sellers. Companies are finding that such auction sites can boost their returns by as much as 20 to 50 percent compared to traditional methods of disposal.
Consider the traditional auction model for disposing of end-of-life fleet assets. Once you've determined that a certain piece of equipment (a wheel loader, for example) has reached the end of its normal lifecycle, you decide to auction it off. But the next auction in your region may be months away, so you hold the item in storage and likely incur expenses during this waiting period. In the meantime, you may decide that the loader needs freshening up, so you pay to have it cleaned and painted to prep it to show. This is just more money out the door.
Finally, as the long-awaited auction approaches, you pay to ship the loader to the auction site. After months of waiting, cleaning, painting and transporting, your asset is auctioned off to one of the same handful of buyers who usually show up. It sells in sixty seconds.
You suspect you could have gotten more for the loader, but at least you've finally disposed of it (assuming the auction wasn't rained out and postponed.)
Online auctions have significant advantages over traditional live auctions. Web-based marketplaces leverage the broad buyer reach of sophisticated search engines like Google to make it easy for buyers to find the available product and online auction. These marketplaces are capable of handling small to very large, multi-million-dollar industrial assets.
One big difference is the size of the bidding pool. A local or regional live auction may attract several regional buyers, but the online audience is practically limitless, like the Internet itself. So, it's no surprise that online auctions are more competitive simply because they generate far more bids than live auctions. When more bidders compete, the price usually rises.
Convenience is another important factor. Selling surplus assets to a handful of local buyers offers the convenience of quick disposal of the assets, but at what cost? Online auctions can be faster, and the initial transition of buyers adapting to a new way of doing things is quickly offset by new cash flow that can be used for new fleet assets or put toward the bottom line.
Given the high price of diesel fuel, transporting an asset to a regional auction has doubled in price. This is an unnecessary expense when auctioning online. Most web-based industrial auctions typically sell assets on an "as is, where is" basis, avoiding the need to move the asset and unnecessary "preparation fees" such as touch up paint and power washing. Instead, prospective buyers know that the item they are bidding on is at the owner's location for pick up by the winning bidder.
They may even choose to visit the site and view the item first-hand before the auction begins. Because online bidders usually have been prequalified and specifically targeted by the auction site's client service staff, they generally are not time-wasting tire kickers. They're knowledgeable and ready to act on the quality information provided online. These buyers are not fooled by a shiny new paint job and, in fact, would prefer to see the actual condition to make their own determination of the condition of the asset.
Industry expertise is one of the most important benefits offered by some online auctions. Experience working with construction fleet equipment is extremely helpful in compiling complete and detailed auction item descriptions, creating accurate condition reports on the assets, gathering and organizing maintenance records and securing high-quality photos. It's also a big help when the seller simply doesn't have the available resources to handle all of these important tasks.
This all works together to ensure that buyers have thorough and accurate information, which in turn gives them the confidence necessary to be active bidders. Client service staff can also ensure that any specific seller stipulations, such as geographic limitations on where the asset may be sold, are considered and included in the auction listing.
One example of the bottom-line benefits of auctioning fleet assets via an online marketplace involved an end-of-life Komatsu excavator. Its owner typically disposed of end-of-life assets through live auctions but found himself investing in refurbishment and transportation to use traditional live disposal methods.
The seller chose to move to an online auction model provider, who worked quickly to create the necessary reports, prepare the asset for auction and market the excavator to over 6,500 prospective buyers. The effort produced more than 1,000 bidder inquiries, ultimately leading to nearly 250 bids. The winning bid generated a return of nearly 80 percent of retail value. This asset's sale was completed, and funds were in the hands of the seller within twenty days, resulting in a swift conversion from assets to cash.
The bidding process itself is where many buyers and sellers will see the greatest divergence from the traditional auction model. As bids are received for the online auction items, asset disposition and fleet managers can review the bids online and approve them from their desk or from anywhere they choose to log on.
Unlike the eBay approach, some industrial online auctions will extend the auction time should there be a change in the leading bidder within the final minutes of the auction. This avoids one bidder "sniping" another by sneaking in a bid at the last second. By avoiding such gamesmanship, the auction results in a truer gauge of the actual market value of the item.
The process doesn't end with the final bid, however. Reputable online industrial auctions should provide an escrow process for handling the auction proceeds. This protects both buyer and seller so a transaction is closed according to the terms outlined in the auction listing details. Clarity and standardization of this settlement process results in higher close rates and fewer "buyer's remorse" situations. Also, online auction results can usually be reported electronically to the seller moments after the transaction close.
Electronic reporting is key for companies that must comply with industry and governmental regulations, like Sarbanes-Oxley. Transparency is inherent in an online auction: sellers can watch the auction in real time and see a detailed report of all bids.
Equipment sellers aren't the only ones who come out ahead using online auctions for end-of-life or surplus assets. Buyers who are not in a position to pay top dollar for brand new or virtually new equipment, or just need a parts donor to use in maintaining their own machines, stand to see many buying opportunities of the products they require. With well-established online auction companies, buyers also gain peace of mind knowing that the auction will be handled professionally, with complete and accurate disclosure of the item's condition and an escrow process for closing the sale with minimal risk.
Experts don't foresee an end to economic downturn in the near future. As business continues to falter and construction continues to slow, companies can turn to online auctions to leverage end-of-life fleet assets and turn idle and surplus fleets into new cash flow.
Construction Business Owner, December 2010
