Methods of Sale Options by Brian Folkes
 
My previous article focused on decision making as to when to dispose of surplus telecommunications,
networking and data communications assets. I discussed the issues of “why” you have surplus inventory and why IT and Electronic product is different from other asset disposal challenges. The “why” is the basis for disposal strategy and time is the crucial element here. With a longer time frame you have the opportunity to maximize your asset sales. The time allowed for disposing of surplus assets and the return on investment on those surplus assets is directly proportional. Essentially, the quicker you want to move the surplus, the lower your ROI expectations should be.

The methods of sale you choose will determine speed of disposal and ROI obtained. There are several avenues available to you. I will cover three in this discussion :
• Auction
• Solicitation of Bids
• Internal Sales Force

Consignment, which is also a significant investment recovery business model, will be covered in a future edition.
Market Dynamics and ROI Consistency

1. Going. . .Going. . .Gone! The Auction Block
When you are dealing with a substantial amount of product or have surplus buildings, entire plants, real estate, heavy equipment, industrial equipment and the like, auctions may be your best option, but

not the first choice when it comes to disposal of IT and Electronic product surplus. Especially if you need a fast turn around and don’t have the resources to handle the sales yourself. But like the equation says, when you feel the need for speed you have to give something up. The advantage of an auction is that within the space of a few days or hours you can sell off a lot of equipment. The disadvantage is you will generally receive a lower ROI.
 
When it comes to IT and Electronic products, auctions present an added disadvantage. By definition of the process (speed, lack of product evaluation and negotiation), important subtle product value attributes and functional features related to technology merits and application relevance do not have substantial influence in the selling process. If you have determined that auction is needed in your situation due to liquidation timing constraints or other conditions, bear in mind the impact on revenue/ROI – and for best results seek out the highly capable auction specialist members of the Investment Recovery Association.
 

2. Bids Rule . . . but still do not take full advantage of market value dynamics to maximize ROI consistently. Probably the majority of surplus IT and Electronic inventory sales are through a bidding process. It’s a time-honored method of disposal and seems like a fair and uncomplicated procedure. The outcome usually results in your selling an entire lot of inventory and management can’t argue with the results. Again, it’s a pretty fast and effective way to move surplus. You send out a list of what you have, give a deadline for bids to be submitted, select the highest bidder (much like an auction

but without the fees), collect the money, ship it out and move on to the next list. But are you always satisfied with the responses and sales results? Actually, again, full market value of the products is not (and cannot) be really obtained.
 
No doubt, this can be a win-win scenario for both the seller and buyer. For the seller, it is a fairly painless and fast transaction: you sell a whole lot of inventory in a short period of time. If you allow the buyer to “cherry pick” the best product, you may obtain a higher return. You will have product left over but it can always be scrapped or sold as part of another lot. For the purchaser, by bidding little and paying for incoming freight, a vendor is able to obtain low priced inventory in the hopes of both flipping some product immediately to reclaim the money spent and making higher profit on the rest of the product. Everybody is happy. But again, ROI is the trade-off of speed vs. return.
 
So maybe in the back of your mind you think “why didn’t more buyers respond and why didn’t they pay more? Why doesn’t a broker pay market price for my surplus? Isn’t the broker attempting to buy low and sell high?” Well. . .yes they are. But consider this. . . every day (Associate) Members of the Association and the thousands of other brokers out there receive dozens of lists to bid on excess inventory from IR departments just like yours. And usually the company is trying to sell everything off as one lot. Many brokers take that list and re-transmit it to other brokers in the hopes that maybe someone else will buy it off of them immediately as well. Sometimes this works and sometimes it doesn’t, but it obviously lowers the price they are willing to offer you. Also, not one distributor out there has unlimited warehouse space or unlimited funds to buy your stuff along with everybody’s surplus IT equipment. So, this allows (or forces, depending on point of view) buyers to pick and choose and to pay only what they reasonably think the product is going to be worth to them. In order to turn a profit in this business they need to buy as low as possible if they are to buy entire lots. It costs money to transport, store, inventory, clean, test, refurbish (if they do) and market equipment. Plus, most inventory lots will have product to scrap or that is unmarketable or just plain doesn’t work as claimed.
 
A buyer will look at your surplus list to assess the risk, see if there is anything that can immediately generate a profit, buy the lot for as little as possible, and flip the “good stuff” immediately for a profit. Finally, they will throw the rest of the equipment on the shelf and look to identify customers later to move it at a profit. For the most part, this is typical of how the system works. Some interesting and informative recent RDS informal case study examples to consider:

1) An Investment Recovery Association member and RDS have a sales arrangement. I had my IR contact send out a list of 10 items that are brand new, current and popular telecom cards to several suppliers they previously sold to and see what, if anything, they would bid on each board. The result? Zero offers. The 10 items sent out were items we had sold in the previous 90 days, from a consignment inventory with time to negotiate on product value, to those same purchasers for over $25,000.
2) A state government communications network (not an Association member) reported that on a recent bid list they circulated to about forty-five purchasers, they had just two responses. The bids were from $1-$2 for each item on the list, and all were good, usable and re-saleable equipment. They sold the lot for $900. A survey of the market revealed these same items where being sold in the $40,000 – $50,000 range. Again, based on more detailed product evaluation and negotiation rather than blanket ‘inventory lot’ bids.
3) And an example of the results of time for diligence and negotiation in a bid situation:
An Association member had a lot of Pentium II & III computers. They sent out 18 bids and received 11 back. The bids ranged from $15,000 to $60,000 with most in the $30,000-$40,000 range. Since the drives needed to be erased as part of the sale, the seller informed me that most of the bids (ours included) factored in the expense to perform a Department of Defense level erasure. At RDS we thought the computers were worth $33,000 based on what we estimated the cost of freight and erasure would be but the lot sold for $60,000. This member covered all of his company’s bases by interviewing the top three bidders to see how they specifically would address the erasure issue and required a signed sales agreement by an officer of the company. They also required documentation after the drives were erased and made sure the company had errors & omissions coverage. Sounds like someone did their investment recovery homework as recommended at our semi-annual seminars!

The point here is that most lots of inventory will sell – if they sell at all – for very little, especially if the equipment is old albeit useable. If the equipment is of a current or fairly recent generation, and benefits from some product/market diligence and negotiation effort you will have more interest and indeed, a higher resale.
3. An Internal Sales Capability Puts You In the Drivers Seat . . . And takes better advantage of market value dynamics for your assets If you have the resources and the cooperation from management,

finance, and a responsive warehouse, an internal ‘distributor-type’ sales force can enable you to maximize your return by keeping control of the operation and profits. You deal directly with the secondary marketplace much as you would when you solicit bids; however, this time you have time on your side. And time manifests itself in terms of maximizing the sale. When you solicit bids or auction the equipment off, you are hoping to sell to someone who will buy your entire surplus at the moment you are trying to get rid of it. This yields lower results.
 

When you act as a distributor you increase the potential of selling items to someone at higher prices because they have an immediate, specific need for it. This may not move the entire surplus, but the

product will sell for a higher price. Normally, IR departments are not set up like a distributor and typically do not have the resources or time to function as a distributor. You want to be out of the equipment and — as your lawyers have already told you time and time again — you don’t want to have any liability issues.
 
However, operating like a distributor can generate higher average sale dollars and higher ROI. In order to do so an IR department needs to be able to sell on terms, invoice, accept credit cards and back up a sale with some type of warranty Additionally, you need to have a responsive warehouse that can immediately ship, maybe even blind-ship. After all if someone is paying “top dollar” they probably have an enduser that needs the product tomorrow!
 
You also need to know how to price something in order to be competitive. Market price levels are fickle; arbitrary and capricious – but based on current trends that can be researched and tracked. Some IR departments may try to value equipment based on book value. Unfortunately, corporate depreciation schedules are set and seldom reflect immediate, real time, changing market conditions affecting used asset purchasing. Actual market value is based on what someone is willing to pay you at that moment in time. But with so many other distributors trying to sell identical product you have to maintain flexibility when it comes to pricing.
 

Probably the one word that describes being a distributor is flexibility. So, if you want to maintain complete control of the process and you have the resources for it and the flexibility, this may be the best way to proceed. It will yield the highest return. Additional note: you also have the option with an internal sales force to target other end-users in your industry (especially through the Association) and skip the middleman altogether. In such a case you will get the absolute maximum from your ROI!

Regardless of what disposal method of sale you choose or need, look to the Investment Recovery Association to help identify top-notch resources and capabilities to fit your needs.
 
Reprinted from ASSET 2.0, the Investment Recovery Business Journal, Vol. 3, 2006

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