Food Plants Using Auctions More Often to Buy and Sell Assets

Chicago-based Loeb Equipment is both a dealer and an auctioneer. If it takes used equipment into its warehouse, its in-house technical staff inspect and repair all machinery.

On Aug. 26 in Kingsport, Tenn., Dean Foods will sell one of its dairy processing plants. Silos, tanks, fillers and all manner of processing systems – the whole plant – will go on the market. By the end of the day, another dairy will own it, lock, stock and milk barrel. Done deal.

An auction will be used to transact the sale. The buyer could be a dairy just entering that market; a processor seeking to reduce long distribution hauls; a company that wants a plant but doesn't want to wait to build. It could also be a firm looking for key pieces of equipment that will sell off the rest in a subsequent auction.

Auctions are one option a company has at its disposal for buying and selling assets. For sellers, they provide quick finality (and quick cash) for a no longer needed asset. Speed also can be an asset for the buyer, for he's looking at equipment that's already built; and he's probably getting it for pennies on the dollar.
For processors seeking to add equipment to a plant, auctions are a good place to start looking. When an auction won't fit the bill, negotiated dealer sales, even rental/leasing companies, can meet the need. These and other used-equipment channels play a role in extending the usefulness of assets and helping food processors operate under ever-tightening margins.

Dealer and/or auctioneer?
The typical auction company has two primary missions: to appraise a seller's assets and to hold auctions that turn those assets into cash. Appraisals also are done by dealer, too, but they also take possession and warehouse the used equipment, sometimes whole processing lines.

Because credit is tight in this recession, food companies have had to find alternatives, which can range from a dealer offering lending or leasing arrangements, to large processors helping finance smaller suppliers or copackers – and then turning to auctions to reduce their own capital expenditures.

Having a relationship with a surplus equipment company of any type helps processors source equipment on a large or small scale. For example, a food company might call a dealer or an auctioneer to locate a single piece of equipment. The auctioneer who has one seller's lot of 100 or more pieces of equipment might or might not have it; a dealer might or might not in inventory, either. However, either party can contact potential sellers in their database (even each other) and find the asset.

Acting as a middleman, the auctioneer or dealer can then facilitate a negotiated sale. Sometimes it's easier when the buyer and seller aren't in direct contact.
Dealers and auctioneers can work in competition to connect buyers with assets, or can even use each other as resources. Dealers can buy at auction, and auctioneers can consult dealers in helping buyers.

Chicago-based Loeb Equipment, which is both dealer and auctioneer, has its in-house technical staff inspect and repair all machinery it takes into its warehouse. After a sale, buyers are entitled to a 10-day right-of-return policy to allow for on-site final evaluations, and "to prevent buyer's remorse." \

In an auction sale, "It's all as-is, there's no warranty or return policy, and we don't test the machinery out," says Charles Winternitz, president of the auction side of the business, Loeb Winternitz Industrial Auctioneers.

It's not bad, it's just a different business model. In exchange for getting what may be a bargain, buyers who use auctions should perform their own inspections before the auction, and know what they'll need to do to bring the equipment up to snuff. And in a recession, bargains have become an increasingly relevant means of budgetary survival.

Buyer and seller both can win in the used equipment market. Equipment in the food industry tends to retain its value better than that in other industries. Even a 10-year-old machine that is well maintained may still bring the seller up to 50 cents on the dollar if the processor conducted good preventive maintenance. And it can bring the buyer savings of 50 percent or more.

Co-opetition among dealers, auctioneers
"A typical situation for us might be that a company with 10 or 20 or more plants is buying another company that has a couple of plants," says Marty Davis, president & CEO of M. Davis Group, Pittsburgh. "What they really want is the smaller company's volume, and maybe the label and brand. And they will move that production to another plant where the added production can bring their percentage of capacity up."

Such sellers typically call the auctioneer to consult, appraise and prepare reports in helping that new plant owner decide which assets to keep and which to sell. In some cases, no equipment avoids the auction block. This was the case at an auction earlier this year in New York, where Davis sold "every last piece of equipment that was in that plant. In other situations, we may sell the 70 or 80 percent of the plant that is not transferred as part of a reallocation of production."

It's not always easy to find good, used equipment. For help, food processors can turn to specialists, for whom this is a core competency. Surplus equipment houses of all types keep their ears to the ground by building relationships, maintaining databases that track customers' plants, tracking public bankruptcy records and being aware of all leads in the used equipment grapevine.

"Typically a dealer doesn't want all that equipment," says Keith Rottman, chief appraiser for Rabin Worldwide, San Francisco. "When we go in and auction a plant, we sell everything including the kitchen sink, whereas a dealer is more likely to want a handful of key pieces of equipment."