Liquidating assets – what’s the current state of the market?
The liquidation value of assets is commonly used as the baseline when assessing the viability of the business by lenders, shareholders, investors and their financial advisors. The demand and pricing for the liquidation of assets is always dynamic. Compounded with the impact of the COVID-19 pandemic, it is even harder to predict with any certainty, and for obvious reasons, lenders have not been aggressive to enforce their remedies for repayment of troubled loans. We don’t know when, but this will change too.
Many well-known businesses and brands have closed and will not return. With the re-opening of the economy, the natural order of winners and losers will be determined, and their stakeholders will want to know their options and whether it’s time to hold or to fold.
Ken Pearl, Partner, Restructuring and Insolvency, spoke with Jonathan Ordon and Don Lee of Danbury Global Ltd.* to get their insights regarding the current state of the market for the liquidation of assets.
How has the pandemic impacted the market for the liquidation sale of assets? Has it reduced demand and prices across all industries or who is buying?
At the onset of the pandemic, especially when the first lockdown was implemented, there was a lot of uncertainty about where the market was heading. However, we did not notice a significant drop in recovery values in many industries. We observed an immediate dip in the recovery values of equipment and inventory related to service industries including restaurants and anything involved in large events. In addition, we also observed weaker recoveries for commercial fitness equipment, larger office furniture, and formal and evening apparel. However, we saw the exact opposite for many products with recovery values significantly increasing as there was a shortage in supply, such as office seating, as a large segment of the population was interested in furnishing home offices. We saw similar trends with home fitness equipment, as well as home improvement and construction materials.
Fitness and gym operations were severely impacted by the pandemic. As a result, commercial fitness equipment (which would never be put in a home for various reasons including electrical requirements) saw a steep decrease in price, but any fitness equipment that was suitable for home use was difficult to find. Used equipment was selling for a high premium because you could not find new machines or weight sets.
Similarly, we conducted sales for office furniture and the price for high quality office chairs increased by 20 per cent. This was mainly because everyone working from home came to quickly realize the comfortability difference between a chair from Staples or Costco versus those from Steelcase or Herman Miller.
We assisted an event equipment rental firm with the total liquidation of their assets. The cost of storing their assets, in their opinion, was too great, and if there was going to be a flood of equipment hitting the market, they wanted to be one of the first to sell, not the last. We saw their recovery values dip on average about 20 to 30 per cent below where they would have been pre-pandemic.
We did not see significant sale price decreases for most manufacturing industries. In many cases, it appears that the prices for equipment are increasing. We conducted a sale for SMT (surface mount technology) equipment where we saw the prices unchanged by the pandemic.
During the pandemic, we have worked with several companies that provide equipment and furniture rentals to the event industry. This industry was hardest hit by the pandemic. One of the companies was attempting to survive by minimizing their expenses. They laid off all of their employees and moved their equipment to storage trailers. They had built a successful business over the last 40 years only to see it wiped out in the span of two months. The owners continue to hope that their business and industry will recover before their cash runs out.
Throughout the pandemic, we have not noticed a significant change in the location of our Canadian purchasers. Decreased supply of used vehicles in the US, as well as rising used vehicle prices contributed to an uptick in US customers registering to buy used vehicles at our sales, and I am sure the same was true for assets in other industries.
Has the pandemic changed the way you prepare assets for sale, or conduct sales of assets?
Technology and the ability to host auctions online have been a part of the auction industry since the early 90s. At the time the pandemic hit, most auctioneers-us included-were able to make the transition to online auctions with ease. For the most part, buyers are very familiar with online bidding platforms, and for new buyers, thankfully there is not much of a learning curve to participate in online auctions.
The process in which we prepare for an auction has remained relatively unchanged, but we have had to continually adapt our removal and check-out policies to comply with the various government restrictions imposed at the time.
As a result of the pandemic, the only method of removing sold assets by successful bidders was through curb-side collection. “As is, where is” is typically how items are sold, and as a result, purchasers must facilitate their own packing and removal. Knowing that “where is” was no longer the norm, we had to prepare the assets pre-auction in a way that would allow our staff to easily move everything to the loading docks, and in most circumstances, this meant grouping a quantity of smaller assets together on pallets or carts. There was relatively no change in how larger equipment was removed because machinery movers were considered essential and were able to operate throughout the pandemic.
The most challenging aspect of the pandemic has been the ability to manage and run a retail liquidation sale. Unlike an auction sale that is geared up to sell over the course of a day and can easily be conducted online, our retail liquidation sales are scheduled to run over an extended period of time to sell to the general public and are usually not able to be conducted online. The ever-evolving landscape of government restrictions that have been imposed with relatively short notice made it extremely difficult to project recoveries as we were forced to deal with early store closings due to lockdowns. Additionally, when we conduct a retail liquidation sale, we attempt to retain key sales staff from the debtor company to assist with the sale. However, we found that on several occasions the former staff would rather stay at home collecting subsidies than work and assist with the liquidation sale.
For example, during the provincial lockdown this past winter, we conducted an auction for excess inventory from Haggar Canada, a clothing retailer. Typically, we would sell the clothing separate from the rolling racks, however, for this auction, we grouped similar items on rolling racks and sold the clothing with the racks in order to facilitate curbside collection. Right from the onset, we were faced with labour shortages, as staff that had been laid off prior to the closing did not want to return to work. As the sale ran into late December, we started facing lockdowns. Every Friday we would follow the news to see if we had to close a store due to government restrictions. One by one the stores were closed, and we had to act quickly to move the remaining inventory and prepare it to be sold by online auction.
What changes have you seen in your business in the past 15 months, including:
- Source of your opportunities – sales by retiring owners, closed businesses, lender enforcements, creditor or debtor insolvency proceedings, appraisal work, etc.
- Types of sales – issues conducting sales
- Liquidation fees – asset purchase and resale, commission-based fees, net minimum guarantees, etc.?
A majority of our work over the past year has come from owner retirements or corporate downsizing. For many reasons, we believe the pandemic certainly pushed several owners into early retirement. We did experience an increase in appraisal work from outside of the insolvency and the asset-based lending community. These appraisals came directly from small and medium-sized businesses, as well as landlords.
We continue to enjoy working with insolvency practitioners as they have great experience in understanding the challenges that liquidators face and can approach files objectively. Individual owners can have emotional attachments to their assets and don’t always understand that even though they bought an asset for “X” it may only be worth “Y”. We have witnessed a significant slowdown of files being generated from insolvency proceedings.
As noted earlier, timed online auctions have really opened up the industry to new entrants. We have seen several companies starting to conduct auctions because running an online auction is easier than conducting a live sale, however, the certainty of a net minimum guarantee is still the most frequent type of liquidation fee requested.
The setup time involved in both online and legacy auctions is relatively the same. Most legacy (or live auctions), have for a long time, incorporated an online component that allowed bidders to place bids live in real time. The major benefit of the online auction is that you don’t require premises large enough to hold a crowd. In addition, you can sell assets that are located in several different locations all in one sale seamlessly as they don’t have to be brought to one central location. The marketing for online auctions remains the same as traditional live sales. This has resulted in more and more US liquidation firms looking to offer their services in Canada, as well as many new firms starting up that only offer timed online auctions.
An online auction typically works best where there may be issues related to the location of the assets. Some examples are:
- assets spread across multiple locations, and it is too costly to centralize them
- the premises where the assets are located are too small to host a live onsite auction
- the assets are located in premises that are not conducive to an onsite auction (like an office tower)
A more common challenge today is where there are assets with more than one lender who holds security. We do our best to explain the advantage of selling all of the assets together in one sale while maintaining the ability to track the recoveries separately for each lender using technology, which can accurately track the details of the sale of particular assets. Selling all of the assets at once saves each lender from having to pay for duplicate services. In addition, they all benefit from being part of a larger offering of assets, which usually draws in more potential purchasers and results in higher recovery values.
What are some examples of how you have dealt with assets which are located out of province or country, or assets which are unusual or specialized?
Online auctions allow us to attract purchasers from anywhere. In the case of retail sales or for removal of assets located in different provinces or the US, we have long standing relationships with established liquidators who we can partner with to offer consistent services.
Sometimes specialized asset or sales knowledge is required, and we will retain appropriate specialists. Original artwork, antiques, or large marine vessels are some examples of assets where we have collaborated with or even referred our clients to industry specialists. However, working with industry specialists is not just limited to asset classes that we are unfamiliar with. We often will work with industry specialists even when we are familiar with the assets. Collaborating has many benefits including access to a greater depth of detailed knowledge, direct access to a clientele that may be looking for specific assets, and up-to-date information on industry trends and customer buying habits.
What recommendations would you have for stakeholders of businesses that have been shut or are in industries with uncertain futures, including:
- Lenders with non-performing loans
- Management, shareholders, investors, etc.?
We strongly recommend lenders have proper supervision in place. We also strongly encourage lenders to obtain appraisals that will assist them in understanding the factors that affect the recovery value in today’s very volatile marketplace.
We always try to encourage business owners that are experiencing losses, or a significant decline in their business, to try to take a step back and make an honest assessment. They have to determine what has caused the business to falter, if they can realistically overcome the issue(s), and most importantly if they can realistically chart a path back to profitability without any extraordinary assumptions. If they are unable to do this, we would encourage them “not to throw good money after bad”, meaning they should not continue to pour additional funds into a business in the hopes of recovering the money that they have already lost. Sometimes the best option is to accept your losses and move on.
What changes do you see as the Canadian economy re-opens and government subsidies end? Do you expect to see an increase in demand and prices once the economy re-opens or will the wave of bankruptcies flood the market negatively impacting realizable value?
As the economy begins to re-open and subsidies end, we anticipate that there will be a wave of insolvency proceedings for liquidation or restructuring of businesses on the horizon. We believe that many companies in the sectors most negatively affected by the pandemic are dependent on the subsidies to operate. We suspect that the economy will not have fully recovered before the subsidies end, leaving many businesses experiencing a cash shortfall.
We are already seeing an increase in recovery prices in many industries. Shortages and rising cost of materials are the leading contributors. For example, at the start of the first lockdown, a lot of restaurant equipment became available, and it appeared the market was going to be flooded. But the flood never really came, and prices now are 10 to 20 per cent higher.
However, it could be some time before we see an uptick in demand and prices for assets related to travel, tourism, or hospitality operations. Some may not recover, such as buffet-style restaurants.
*About Danbury Global Ltd.
Jonathan Ordon, President of Danbury Global Ltd., over the past 15 years in the liquidation business, Jon has learned how to value Personal Property, specifically consumer goods and machinery and equipment, through actively selling assets on a day-to-day basis throughout Canada. He has done this by selling assets through Auction, Retail and Wholesale liquidation, and/or Private Negotiation. To date, Jon has been involved in over 500 auctions, liquidations, and retail sales
Don Lee, Head of Auction & Appraisal Services for Danbury Global Ltd., has significant experience in appraising, auctioning, and liquidating a large variety of consumer and industrial inventory, as well as machinery & equipment from over 50 industries. Donny has conducted over 700 auctions in Canada the USA since becoming an auctioneer in 1999 and has sold over 600 million dollars in assets.
About the author
Ken Pearl, MBA, CPA, CA, CIRP, LIT, is a Partner of Fuller Landau LLP and a Senior Vice President in the Restructuring and Insolvency group. Ken can be reached at 416-645-6519 or kpearl@fullerllp.com.