The Auction Whisperer

The new business survival rates, as reported by the Small Business Administration, are actually more promising than what people have been telling us. Seven out of ten new businesses survive for at least two years and a little over fifty percent survive for up to five years.

If you can avoid the obvious pitfalls, the top two reasons why businesses fail, then your odds at success increase substantially. The first reason is poor management. You can’t be expected to know everything. Evaluate your strengths and weaknesses and ask for help in the areas where you fall short.

It’s easy to just go out and hire whomever you need to give you the best fighting chance, but in reality that is just not practical. You have got to watch your costs. Perhaps you have friends with management experience who would be willing to give you advice or even do some temporary consulting.

The second reason why businesses fail is lack of capital. How long should you save before you start your business? Is it five years, ten years or longer? That’s not very practical either. You have to be willing to borrow money if that’s what you need to do. Borrowing money from friends or family is not a good idea, unless there is no other option available to you.

If you do go this route, be sure to treat them as if they were a professional lending institution. Do not take advantage of the personal relationships you have with your benefactors. No late payments, no skipping payments, no whining in general.

Not only do you need enough initial capital to either buy an existing auction house or start your own, you must have enough operating expenses to keep your business going. The auction business can be especially difficult on your wallet, at least in the beginning.

Remember that most of your sales will come from consignments. You are not selling products that carry a substantial mark-up. You are operating your business on a percentage of the total sales plus a buyer’s premium. On average, you are looking at collecting roughly 30 to 40 percent of the items you sell for other people.

This percentage is not a constant. Some of your auctions will do much better than others. The total revenue take for an auction depends on whether you have a good crowd and whether you have good merchandise or mediocre merchandise. Thirty percent of a thousand dollar item is three hundred dollars. Not a bad return on a single item. However, thirty percent of a ten-dollar item is only three dollars. You won’t be paying too many bills with three dollars.

You also must consider that, in the auction business, the only time you make money is during the three or four hours when the auction is actually taking place. The rest of the time, you are doing prep work. If you have to cancel an auction due to a hurricane, for example, then you have made no money and will make no money until you have that auction. You must have enough funds set aside to pay your bills. Unfortunately, the bills keep coming whether you have an auction or not.

If you find yourself falling behind, consider changing how frequently you have auctions. Running once a week or every two weeks brings in a lot more money than just running once a month. Obviously you and your staff would have to work much harder if you increase the number of auctions but it is better than the alternative.

Every new business is a risk but one must take risks in order to reach a certain level of success. There are thousands of auction houses all across the country that have been in business for a very long time. So, be positive, start with as much money as you can and, above all else, manage wisely.

05/04/2012 by Anne Benedetto

Choosing a business structure is important. When you decide to start a business, it is one of the first things you need to do. It will dictate how you conduct business and it will also determine how you file your federal income tax returns with the IRS.

There are roughly six different options available to you. They are: limited partnership, general partnership, sole-proprietorship, limited liability company, corporation and S corporation.

For the most part, an auction house with a single owner and a single location are almost always set-up as a sole-proprietorship. In addition to being the easiest, it eliminates the expenses associated with forming a corporation. However, every rose has its thorn.

Under this business structure, the owner has unlimited liability for all debts associated with the auction house. This means that your personal assets are not protected. Should your auction business fail, your creditors can come after not just your business assets but your personal property as well.

When filing your tax returns, your business income, along with any business losses, are reported on your individual tax return. It is added to any other earnings you may have including your spouse’s, if you are married and filing jointly.

A number of sole-proprietors in the auction industry are actually husband and wife teams. If this is going to be the case with you, you must pick either you or your spouse to be the official owner of record. The other person must be treated as an employee. The one selected to be the employee can have whatever title is necessary to show that he or she is in a position of authority.

The spouse that is the employee is paid a regular salary and therefore must have all applicable payroll taxes deducted from his or her paychecks.

The other spouse, the actual owner, cannot be paid a salary. However, this person can take a weekly, bi-weekly or monthly draw against profits. No taxes are to be deducted from such draws.

The business must make estimated tax deposits to the IRS each and every quarter. The amount of money you owe at the end of the year will be offset by these payments. It is up to you or your accountant to determine the appropriate amount to be deposited every three months. You will either owe money or be due a refund when it is time to file your tax return.

With a sole-proprietorship, you do not have the same debt protection as you would if you were a corporation, so you may want to seriously consider obtaining business liability insurance.

05/04/2012 by Anne Benedetto

Once you have decided to open an auction house, there are some government and business requirements you must take care of before you can have your first auction.

Business Structure. The first is to decide what type of business structure is best for you. There are at least six to choose from. The most common and the easiest to establish is a sole-proprietorship. You will find that most small businesses are classified this way. You should seek the advice of your accountant or research the different choices yourself. You can find everything you need to know about this on the Internet. The structure you choose will govern how you do your tax returns.

Create a Business Name. If your last name is Smith and you want to call your business, “Smith’s Auction House,” no further action is necessary. You have a right to use your legal name as the title of your business. However, should you want to call it, “Smitty’s Auction House,” or, “ABC Auction House,” you need to file the necessary papers that will allow you to use a fictitious name. This is the same as registering for dba status (doing business as). This is a state regulation, rather than a federal one.

Get a Local Business License. Again, this is a state function. Many states require that you have a license to conduct business on your premises. It is often called a Tax Occupancy License or an Occupational License. Check with your local government’s web site to determine if this is in fact necessary.

Secure an Auction Business License. In 29 states, auctioneers are not required to have a license. You will have to check with the state authorities where you live. Even if a state doesn’t issue auctioneer licenses, they may very well issue auction business licenses. In most licensing states, there is a major difference between the two. If required, you must have this license before you can officially have an auction.

Federal ID Number (EIN – Employee Identification Number). This is an absolute necessity. You cannot conduct business without it. You will be required to include your EIN on all documentation having to do with the Internal Revenue Service. It is also a mandatory field on all the W-2′s and 1099′s that you will issue. You can easily file for a Federal ID Number online.

Sales Tax Resale Number. If you will be doing business in a state that charges sales tax, you must have a sales tax resale number. This will allow you to collect sales tax from customers who are not sales tax exempt. In the auction business, more than half your customers will be dealers who have a resale number. You need to collect tax from those who do not have one. You will also need to file a monthly form reporting all sales, exempt and non-exempt. At the same time, you will have to pay the state the sales tax you collected on its behalf.

Open Two Business Checking Accounts. You will use one account for operations – payroll, bill paying, etc. Some states require auction houses to pay their consignors out of an escrow account. Even if the state you live in doesn’t require it, it’s not a bad idea for you to do this anyway. This eliminates any co-mingling of funds. You are expected to only deposit that amount of money needed to cover your consignment payments for your most recent auction. After you have paid your consignors, and before you deposit the money for the next group of consignors, there should be no more than a one hundred-dollar balance in your escrow account. It is strictly a clearing-house for consignment payments. “Escrow Account” should be clearly printed on the face of each check.

Once you have completed everything on this list, you are ready for your grand opening.

05/04/2012 by Anne Benedetto

Whether you are starting a new auction business from scratch or buying an existing auction business, four years ago, you would have been smart to say, “I’m going to buy the building.” However, hindsight is twenty-twenty. Today, because of the downward spiral the real estate market has taken, buying it would have been a mistake. The drastic loss of value you would have sustained may very well have put you out of business.

In a perfect world, owning is always better than renting. When you own you build equity for yourself rather than for someone else. Owning can also provide you with some attractive tax breaks, such as a deduction for the interest you pay on your mortgage.

Just as important as the equity and the tax allowance is the advantage owning gives you should you decide to sell your auction business. If all you have to offer is the business itself, then the only things you would actually be selling are a customer file and the good will you have worked so very hard to develop. While this can be valuable and can command a nice chunk of change, it does have a major drawback. To really deal from a position of strength, you need to own the facility.

Location is one of the most important factors in the success of any business. Prospective buyers will want to do their due diligence. If they are impressed with your revenue numbers then they may be very interested in buying what you are selling. However, they will carefully consider whether or not those same numbers are likely to continue should they have to relocate the business.

Just like you, once the new buyer assumes ownership, he will be at the mercy of the landlord. This is not always a good place to be. The threat of possibly having to move at some point will affect the price you can get for your auction business. The number of years remaining on your lease will also affect it.

When starting an auction or buying an existing auction, if you decide to lease the facility, make sure it stipulates that the lease is transferable should you sell to someone else. You should demand at least a ten-year lease. Should you decide to sell your business in five years, a lease option for five more years will somewhat calm the fears of your potential buyers.

In the present real estate climate, as long as you can afford it, it may once again be a wise decision to purchase a facility. Hopefully, the real estate market will start to recover sooner rather than later. If it does, you will not only be making money on your auction business, you will also be making money on your building.

There are many large corporations out there who rent all of their facilities. When asked why they don’t own those facilities, when they can clearly afford to do so, most of them respond simply by saying, “We are not in the real estate business.” This might be fine for multi-million dollar businesses but the small business owner needs all the help he can get.

Ultimately, you will have to decide which is best for you. Just be sure to consider everything involved before making a decision that will have such a huge impact on the success of your auction business.

05/01/2012 by Anne Benedetto

As an auction business owner, it is difficult for you alone to control your revenue. There are so many outside forces affecting it, such as the economy, the type of merchandise consigned to you, the quality of that merchandise and the size of your crowd on auction day.

Even if you produce effective ads to draw in bidders, you are powerless over how successful your advertising partners are at managing their own businesses. If their readership is down, your ads will not be as effective as they should be no matter how well written they are.

Since such external factors can adversely influence your auction business, you have to capitalize on that which you can control – your day-to-day expenses.

Obviously you do not decide how much a dealership is going to charge you for a new truck, but you can decide to buy a used truck instead. You can also pick a cheaper building if the one you are looking at is too expensive.

A reasonable overhead, without sacrificing what you need to operate your auction business effectively, is just as important as the amount of revenue you take in. When and if your revenue drops due to unforeseen problems, you must be ready to make corresponding adjustments to your budget.

It goes without saying that the last place you want to make cuts is in staffing. Your employees will be counting on you for their jobs, especially if they have families to support. You should exhaust all other avenues first when it comes to reducing your costs. Personnel should be the last resort.

Many times when painful cuts have to be made, business owners slash their advertising budgets first. This is usually a mistake. When times are tough, that is when your advertising can prove to be your most valuable asset. You must keep your name out there. Some ad venues are less expensive that others, such as the Internet. Drop the more costly ones and double up on the less expensive ones. If you don’t maintain a proper presence, when things improve, your auction house will just be a distant memory.

Even if you are starting your auction business with more than enough money, you must have a plan in place to keep your overhead in line with your sales. Should your revenue drop, so must your expenses. You must always be prepared for those sudden climate shifts that can happen to any business.

The new business survival rates, as reported by the Small Business Administration, are actually more promising than what people have been telling us. Seven out of ten new businesses survive for at least two years and a little over fifty percent survive for up to five years.

If you can avoid the obvious pitfalls, the top two reasons why businesses fail, then your odds at success increase substantially. The first reason is poor management. You can’t be expected to know everything. Evaluate your strengths and weaknesses and ask for help in the areas where you fall short.

It’s easy to just go out and hire whomever you need to give you the best fighting chance, but in reality that is just not practical. You have got to watch your costs. Perhaps you have friends with management experience who would be willing to give you advice or even do some temporary consulting.

The second reason why businesses fail is lack of capital. How long should you save before you start your business? Is it five years, ten years or longer? That’s not very practical either. You have to be willing to borrow money if that’s what you need to do. Borrowing money from friends or family is not a good idea, unless there is no other option available to you.

If you do go this route, be sure to treat them as if they were a professional lending institution. Do not take advantage of the personal relationships you have with your benefactors. No late payments, no skipping payments, no whining in general.

Not only do you need enough initial capital to either buy an existing auction house or start your own, you must have enough operating expenses to keep your business going. The auction business can be especially difficult on your wallet, at least in the beginning.

Remember that most of your sales will come from consignments. You are not selling products that carry a substantial mark-up. You are operating your business on a percentage of the total sales plus a buyer’s premium. On average, you are looking at collecting roughly 30 to 40 percent of the items you sell for other people.

This percentage is not a constant. Some of your auctions will do much better than others. The total revenue take for an auction depends on whether you have a good crowd and whether you have good merchandise or mediocre merchandise. Thirty percent of a thousand dollar item is three hundred dollars. Not a bad return on a single item. However, thirty percent of a ten-dollar item is only three dollars. You won’t be paying too many bills with three dollars.

You also must consider that, in the auction business, the only time you make money is during the three or four hours when the auction is actually taking place. The rest of the time, you are doing prep work. If you have to cancel an auction due to a hurricane, for example, then you have made no money and will make no money until you have that auction. You must have enough funds set aside to pay your bills. Unfortunately, the bills keep coming whether you have an auction or not.

If you find yourself falling behind, consider changing how frequently you have auctions. Running once a week or every two weeks brings in a lot more money than just running once a month. Obviously you and your staff would have to work much harder if you increase the number of auctions but it is better than the alternative.

Every new business is a risk but one must take risks in order to reach a certain level of success. There are thousands of auction houses all across the country that have been in business for a very long time. So, be positive, start with as much money as you can and, above all else, manage wisely.

Many people think that starting your own business is cheaper than buying someone else’s. This is not necessarily true. If you are looking to open an auction house by leasing a big impressive facility then you are looking at a lot more monthly overhead than if you were just to lease your basic average sized building. If you find an auction house for sale that’s in a modest building with a lot less wow factor, buying the existing business might be cheaper in the long run.

It’s important to remember that, in the auction business, it’s the merchandise not the building that brings in the customers. There are many run down auction buildings that do big business. Metal buildings with no heat or air conditioning, bathrooms outside, leaky roofs – no one cares. They only care about the antiques and collectibles inside.

Should you buy an established auction house, you will probably be able to transfer many of the existing bills right over to you. This may save you some money. However, you may be stuck with keeping the existing name. Unless you use your legal name as the name of the business, you will have to file paperwork that allows you to use a fictitious title, such as ABC Auction House. Just remember that an established business is no longer “established” if you change the name.

The actual cost of the business itself will depend on how successful it is. You will need to go over the books carefully. You should pay to have this done by a professional accountant, preferably a CPA. You will also want to look at corresponding tax returns to make sure there are no potential problems going forward.

Don’t be too troubled if the revenue seems to have fallen off. Try to find out why. More often than not, the reason for reduced revenue has more to do with the owner and his business practices than it does with the economy or the location of the auction house. This situation could prove to be a better deal for you than if the business was going gangbusters. You will pay dearly for “gangbusters.”

If you find that the problems have to do with the owner and how he runs his business, you might want to buy it. The cost will be greatly reduced and you can turn things around rather quickly by not following his lead. Once the word gets out that the business has changed hands, the bidders and the consignors will come back. Look upon this as sweat equity. You get the business for less but you increase its value almost immediately with a little personality and good will.

The best advantage to buying a previously owned auction house is that it is already has a known clientele, even if you have to coax some of that clientele into coming back. At least they already know where it is. A brand new start-up business can take you months and months to establish. Although you are not saddled with the cost of buying someone else’s business, the advertising associated with a start-up can be outrageously expensive. No one has ever heard of you before. No one has ever been there before. They will be leery wondering if you will still be there in three months time. People are afraid to turn over their antiques to a stranger – they want to know that they are going to get their money and get it on time.

Perception becomes reality. Even if they don’t know you, if you take over an existing auction house, there will be a level of comfort there. This is especially true if the auction house you bought has been around for a long time. Until they know you better, they will put their trust in the house itself.

Another positive aspect of buying a previously owned auction business is the staff. They would probably be very happy if they got to keep their jobs. If they are competent employees, you should be just as happy. Hiring and training new people is very expensive. It is especially expensive in the auction business. There are not a lot of really experienced auction workers out there in the job pool.

Both these business options have their pros and cons. Before you decide whether to do a start-up or buy an existing auction house, try to talk to a couple of other auction owners. You may be surprised by their willingness to share their insights and experiences with you.

In the world of auctions, you not only have to advertise your location, your hours, and your auction dates, you also have to advertise your merchandise and that merchandise changes with ever auction.

It is difficult to keep auction ads small in order to keep costs down. If you have an auction with three hundred or more items, you have to advertise a number of those pieces. You cannot just say that you have three hundred antiques and collectibles. You need to attract the people who are looking for exactly what you have.

As an auction house owner, you will be legally responsible to get the most money you can for the items that have been consigned to you. If you fail to properly advertise those items, you are asking for trouble.

Not only is print media no longer as effective as it once was, it is much more expensive than it once was. The per word or per line classified advertising rates in most major newspapers increase pretty frequently. However, the subscription numbers for most of them are on the decline.

Since your ad copy has to change with each and every auction, it can be very cost prohibitive to do radio spots. The set-up costs alone would eat up your ad budget in no time.

What’s the answer? Internet advertising. It can reach the most people and it is the least costly. Don’t get confused by auctions on the Internet. There are online auctions that only sell online. There are also real brick and mortar auction houses that take live Internet bids in real-time. The Internet bidders compete against the bidders that are physically present at the auction house. Then there are real brick and mortar auction houses that only take bids from people on the auction floor, but they advertise their auctions on the Internet.

There are several sites that will allow you to post each of your auction events for free. On these sites, not only can you post as much text as you want, you can also post as many pictures as you want. Buyers in your area will see these ads and will attend your auctions if you have what they want. You may also get business from buyers who are on the other side of the country. If you are willing to accept telephone bids, and agree to provide shipping at their expense, you can seriously expand your business at almost no additional cost.

It would also be in your best interest to have your own website. The initial cost for setting one up is only a few hundred dollars. Once your website is active, you can advertise all you want without worrying about paying so much a word or so much a line, like you have to do with print media. As the expression goes, a picture is worth a thousand words. Putting pictures on your website of the better items being offered for auction is an impressive sales tool.

At one time, an auction house owner might have spent upwards of 30% of their budget on advertising. Now, you can have an effective advertising campaign for around 10% or less.

Of course the best and cheapest form of advertising for any auction house is word of mouth. If you treat both your buyers and your sellers fairly, they will tell someone, who will tell someone, who will tell someone. Well, you get the idea.