Asset Recovery - Divestment Options
Divestment is one of the most difficult and complex tasks that an investment recovery professional undertakes. Effective divestment brings in additional money or benefit for an item, clears out space in a location, and allows the business to use the capital generated for a productive purpose. When divestment is done poorly, it can result in extra costs for getting rid of an item, loss of a valuable asset, or even increased liability to the divesting organization. This article will list things that asset recovery professionals need to consider for divestment and will provide some best practices that can can be used during the divestment process for an asset.
Understanding the Asset
Before making any divestment decisions, it is important to understand the asset that you wish to divest. This involves gathering as much information as possible about the asset. Some important things to consider include the condition, other asset details, the materials that asset is made of, the location of the asset, book value, fair market value, and the time available to divest the asset. This is not an exhaustive list, but is a good place to start. This section outlines these areas and provides some reasons why these are important things to understand about the asset.
The condition of the item is very important in making a divestment decision. If an item is in very poor condition, it will not be able to perform its intended task. Consequently, both its market value and the divestment options for the piece of equipment are limited. Sometimes it will not be entirely clear what condition the item is in. It may need to be tested, serviced, or inspected. In order to assess the condition, it is helpful to be in contact with the person or group that originally used the piece of equipment. This person or group will know a lot about its history, how it was used, and its current condition. If this is not an option, you may need to bring in an expert to inspect it.
Details of the asset or piece of equipment can also be very important. Some key things to know about a piece of equipment include the name of the assets, the manufacturer, the date of manufacture, model number, weight, serial number, power, range, or other important attributes. In asset recovery, it can be helpful to know if the item has other uses. Some pieces of equipment have other uses besides how they are currently being used by the organization. Generally, the more details that you have on a piece of equipment, the easier it is to make a divestment decision.
The materials the asset is made of can be very important in making a divestment decision. If the item contains hazardous chemicals, the range of divestment options are limited. In this case, special disposal procedures may be required. Other items may not be functional, but could be made of valuable metals. These metals could be recycled or sold for scrap at a price that may be more than the asset is worth on the books. Other materials may not offer any value or incur extra disposal costs.
Knowing where the asset is located can play a huge role in how the asset should be divested. If an asset is located in a town or city where there are many other companies that could use the asset, it may be more valuable then if it were located in an isolated location. This can be especially true if it is difficult to transport. Some pieces of equipment need to be sold to local buyers since the costs of transporting the item exceed the cost of the items itself. If a dedicated pool of local buyers exists for the asset, it will be easier to sell the item. Some equipment or asset may be designed to work at only one location. For example, a piece of the equipment may be calibrated and designed for the US, but may take repair or work to do its intended function in Europe.
The value that the asset or piece of equipment is listed for on the company's books can often play an important role in divestment decisions. This comes into play in several ways. First, if the piece of equipment has a high book value, but can not be sold for that price, it could result in a loss on the books and qualify for a tax write off. Second, the book value is not often indicative of the value of the product. If the owner of the equipment believes that the equipment is worth more than it can be sold for, then it can be difficult to get the owner of the equipment to sell this piece of equipment at a loss. Third, some equipment may have a book value of zero, but may still have value to another buyer.
Fair Market Value
The fair market value of an asset is the value that an asset could reasonable be sold for to a buyer on the open market. This obviously is an important measure since it will ultimately determine an asset's sale price in divestment. However, the fair market value is not always known to the seller of the equipment. The fair market value can be influenced by many things. These include the condition of the asset, the scarcity of the asset, the number of buyers, the market for these assets, and ease with which buyers can be located. To assess the value of an asset, companies can examine sales of comparable assets or to obtain offers on the equipment from prospective buyers. Some companies use appraisals or get experts to make a valuation of the asset.
The time and difficulty it takes to learn the value of an asset and to divest it optimally make be too great for the organization to undertake. It may be more costly to find the value of the asset or to locate a buyer than the asset itself is worth. Also, when an asset recovery professional is stretched for time and has many other assets to divest, time can play a key role. When an asset takes too much time to sell, it may make sense to use an outsourcer or get rid of it quickly without worrying about getting the best price. This is especially true if the asset is not a high dollar divestment.
Choosing the Divestment Venue
Choosing the appropriate venue or asset divestment method can be quite challenging. There are many method of divesting an asset. These can include standard ways to standard asset sales like selling via a product catalog at a fixed price or conducting a negotiated sale. Other options like conducting a sealed bid, offline auction, or online auction can also be used. For some assets, third parties like a consignment vendor or a specialty exchange might provide the best return. Other materials are hard to sell or might need to be divested via scrap/recycling, disposal, asset destruction, or donation. This section intends to provide some basic guidelines and some things to think about when considering when to use each of these methods.
Catalog or Fixed Price
One of the most straightforward ways to divest an item is to sell the item at a fixed price. Often this entails setting a price for the item and someone purchasing it. This method works well if the asset recovery professional doesn't have a lot of time and the price is a favorable price for buyers. It is also a good method to use if the company divesting the asset has a strict selling policy and it provides an easy to use format for selling assets. Selling an item in a fixed price format is also easy for buyers to understand since this format is most commonly used in e commerce. The drawback to this method is that if the price is set too high or too low, either the asset will not sell, or it will sell for less than it is worth.
Asset recovery departments also choose to sell products in a negotiated format. This is one of the most common ways to sell an asset. It gives the buyer and the seller the ability to negotiate a price. In fact, the seller can negotiate with multiple buyers to obtain the best pricing. The drawback to this method, however, is it is often quite time consuming to do these types of negotiations. Therefore, negotiated sales are often reserved for high dollar items where the seller is an expert in the type of asset and has the time to conduct the negotiation. This is also a helpful method when you need to reach an agreement on terms other than price and when these terms matter a lot.
Sealed biding can be a good divestment option. Sealed bid sales are often compared with auctions. In a sealed bidding event, prospective buyers submit the best and final offer for an asset. The seller selects the best offer (often the highest offer) and completes the transaction. This can be a good option, because depending on how an event is set up, the management for sealed bids can be minimal. Sealed bids can be conducted via email, mail, or fax and can include variables other than price. For some assets sold via sealed bid, the results can be similar to offline or online auctions. However, some people will not be able to participate in a sealed bid process because they will have to submit paperwork and pricing. If a sealed bid option is used, it is important to keep it simple so that buyers do not have to spend extra time to participate. Low rates of participation produce low sale prices. These events are often best when dealing with experienced buyers or brokers.
Offline (oral outcry) auctions can be a viable divestment alternative. The process is fair and transparent. The benefits are that these events will produce the same price competition as sealed bidding or online auctions. However, the costs to conduct an event like this can be quite high. The companies that run these events often have a dependable group of buyers that consistently attend these events. These events are perhaps most appropriate when it is important to see or inspect the equipment in person. In these cases, the extra benefits can outweigh the additional costs which run at about 10 to 15% of the sale price. One additional drawback associated with these events is that since the auction will take place at a particular location and time, people from other geographic locations who can not attend will not be able to participate.
For companies that can effectively execute online auctions themselves, this presents a very attractive divestment option. Online auctions offer many advantages vs sealed bid or offline auctions. Online auctions provide the maximum transparency and fairness into the asset divestment process. Since they are held online, they are open to the greatest number of people. Participants in online auctions can include end users, brokers, other manufacturers, employees, or other interested individuals. In addition, online auctions are easy to participate in and sell items in a structured, dynamic format. Unlike sealed bid format, online auctions provide immediate price discovery. A participant knows whether or not his or her bid was the best bid right after placing the bid and can place a new bid accordingly.
Online auctions work for many kinds of items. They work when there are many prospective buyers, when an item is scarce, when the value of an item is uncertain, or when the sale price of an item is not as important as selling the item quickly. For these scenarios, online auctions offer considerable value over other alternatives. It can take some planning and forethought to get a system and procedures in place to most effectively make use of these capabilities.
For asset recovery professionals without a lot of time, using a consignment vendor can make a lot of sense. Consignment vendors will take a company's equipment and move it to the consignee's warehouse without taking full possession of it. The consignment vendor will then sell the piece of equipment or asset and will charge a rate of commission based on the amount of the completed sale. This commission is often around 15% of the sale price of the asset. Some consignment companies will also charge additional fees. The advantage to using consignment companies is that they can provide services like identification of an asset, cataloging, transport, evaluation and appraisal. This can be advantageous when an asset recovery department does not have a lot of people or when equipment needs to be moved out of its current location. The obvious drawback is the cost.
Specialty marketplaces can also provide value for asset recovery departments. Specialty exchanges are exchanges that are commonly recognized as markets for these types of products. They are places where buyers of these specialty assets and sellers of these assets gather and conduct business. The advantage to using these specialty marketplaces is that products will by displayed to a large number of prospective buyers. Consequently, the sale prices can be higher than an asset recovery manager might otherwise be able to obtain. The drawback to these marketplaces is that they charge a commission of around 10% of the sale price.
Scrap / Recycle
When a piece of equipment is too old or well used to be sold, it can be scrapped or recycled. Many pieces of equipment are made of materials that have some residual scrap value or some recycling value. If it is made of metal, scrap companies will often purchase the equipment on a weight basis. Some metals that are often sold in this way include steel, aluminum, copper, or iron. This is often less than what the equipment could be sold for productive use, but is better than having to dispose of the asset. Other assets can have precious metals that can be quite valuable as well.
Some pieces of equipment can not be sold for a lot of money, but may have value to a school or non profit. In this case, donation might make sense. In a donation, the donating company gets a small tax write off and also gets goodwill by helping out the community in a way that does not cost a lot. The drawback of a donation is that the organization receiving the asset can misuse the asset and put the donating company at risk. Before setting up a donation program, it is important to have procedures and agreements in place to make the donation a success.
When a piece of equipment can not be sold donated or scrapped, it may have to be removed and disposed of. This is not one of the best outcomes for an asset recovery department since it involves incurring costs to remove the piece of equipment and does result in any revenue. Moreover, some pieces of equipment may contain hazardous chemicals that can not be placed in a landfill. Many of these pieces of equipment need to undergo specific treatments in order to be disposed of. These can be quite costly and, if done improperly, can put the company at risk. It is important to make sure that the vendor that is selected to dispose or remove the equipment does so in a way that conforms to all laws and actually does what they contracted to do.
Some assets are so valuable to the company that they include trade secrets and can not fall into the hands of a competitor at any cost. Even though these assets could be sold on the market, for strategic reasons, the company may wish to destroy them. In this case, the company would contract with a certified destruction company. This is expensive but can be necessary for these types of assets.
An asset recovery manager seeks to maximize the value of assets obtained during the divestment process. Consequently, an asset recovery divestment plan or program for a company should take into account the factors listed above along with the resources available to the department. There is no one size fits all plan that will work for all companies. The plan adopted will be dependent on the assets that a company most frequently divests and the size of the asset recovery department. However, with the guidelines above and the right systems in place, an asset recovery manager has a good place to start.
To learn more about Epiq's investment recovery solutions, navigate to Epiq Recovery pages using the links below.