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Thread: Is there a better format for online auctions?

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    Is there a better format for online auctions?

    Seeing two recent threads about alleged shill bidding on Flippa got me thinking about online auctions in general. The only one I have actually used is eBay, but it has one feature that it shares with Flippa that is absent from live auctions - the seller can have private conversations with one or more buyers during the time that the auction is open for bids.

    The people running the auction have the ability to examine the conversation logs, but I suspect that they're only interested in ensuring that buyers and sellers don't enter into private agreements to the auction site's disadvantage. If, as described in a recent EP post, a seller tries to entice a bidder to continue by feeding him 'inside information', no-one else sees this conversation. In a traditional auction, buyers examine the lots and perform whatever DD may be appropriate before bidding opens. No further information is exchanged once bidding starts. Shill bidding still happens, but you don't get auctioneers pretending to pass privileged information privately to specific bidders.

    There are plenty of people on EP who have far greater experience of auctions in general than I have. I'd be interested to hear their views on the way online auction systems should be designed and administered. In particular, do they believe there are advantages in allowing seller/bidder conversations to take place once bidding has started? What would be the disadvantage of disabling seller/buyer messages once bidding starts?

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    Interesting observations Communication and trust is paramount for all commerce sites. Everything sold online is subject to questions. The way a company handles these questions is a direct reflection upon the reputation perceived and trust received.

    Online auctions have their place when people are selling products or services with variable values. This ability to assess value varies by buyer. Overpayment in an auction is always a risk. Auctions of items with suspected inaccurate documentation or questionable appraisal will lead to buyers who have decided to assume risk. Those buyers who do not understand which items carry risk, nor how to adapt to this variable, are those most likely to be dissatisfied with their buying experience. Buyers that do understand the risk factors can adjust expectations or choose to avoid the purchase.

    Quote Originally Posted by Chabrenas
    I'd be interested to hear their views on the way online auction systems should be designed and administered.
    The solution for growth of an auction house is typically counter-intuitive. There are always ways an auction house can lessen the risk to buyers. This often requires limiting the number of sellers. Fewer sellers of higher quality goods brings greater competition from buyers willing to return with more money for new listings. Quality goods from external sellers that can be trusted is the only solution that permits growth, auction or fixed pricing. An auction company must err on the side of the retention of those bringing real money to what is being offered for bid.

    Finding the proper mix between seller control while retaining buyer trust is a testing process that has led to business failure when performed incorrectly. Amazon and eBay have procedures adapted to control sellers and retain buyer traffic. Newer sites that permit online independent sellers into their marketplaces, Sears, Tesco, Best Buy, NewEgg, Rakuten, are all dealing with control of sellers and trust issues while trying to remain friendly to sellers and not lose repeat buyers. While each marketplace has a reputation that typically adjusts to become the combined reputation of all sellers, every purchase leads to a single and personal buyer perception that must remain positive under every circumstance. Auction sites are subject to these same dynamics, as is every commerce site allowing external drop-shippers or independent sellers.

    Quote Originally Posted by Chabrenas
    do they believe there are advantages in allowing seller/bidder conversations to take place once bidding has started? What would be the disadvantage of disabling seller/buyer messages once bidding starts?
    I believe communication between buyers and sellers is a necessity through the close of an auction. Public posting of information brings more bidders when further information is provided. Private discussion and private DD give advantage to buyers who know how to adjust for risk, but will not lead to greater trust in the venue or the seller. Honest open dialog between buyers and sellers brings bidders back the next time, even those who did not win.

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    Public posting of information brings more bidders when further information is provided. Private discussion and private DD give advantage to buyers who know how to adjust for risk, but will not lead to greater trust in the venue or the seller
    I agree strongly, and I can understand that buyers would not necessarily want to give away free the results of DD that cost significant time and expertise. But why do you believe in maintaining communication after an auction has started? That doesn't happen in live auctions - all DD is performed before the auction starts. However, an online auction of a single item lasts for days instead of minutes. If all DD were completed before the auction started, an online one could take only minutes - but that would stop it from being a worldwide event, because of time zones. Interesting trade off.

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    There are live auction events online. Many auction houses have live events which also allow remote bidding. Internet bidders are often assigned individual proxies by houses like Sotheby's and Christie's. Smaller auction houses may simply assign one or two employees to watch live online bidding of approved buyers, then raise their paddles when online exceeds current bid amount. Once upon a time, eBay had global live events at eBayLiveAuctions.com and closed it the end of 2008. Participation was low, which allowed some amazing deals for buyers. Unknown and inconvenient auction events are often a source of low-priced inventory for those willing to research and attend.

    Auction listings on web sites typically appear with no prior notice and run over several days. The contents of the listing are not known prior to the seller placing the information. Live auctions typically have published lists of items to be auctioned at a specific date and time, so that items offered can be researched prior to the start of bidding. Established sellers in online auctions (such as eBay) maintain buyer lists that are sent a heads-up email prior to the listing being placed. For some products, domain names or websites, sellers may email metrics and notices to (potentially) interested parties assembled from online research, which allows greater success with listings

    Live auctioneers typically have a specialty. One may know restaurant equipment liquidation, another may be an expert in auto auctions. Every auction company, every auctioneer, wants that customer back at their next auction so they will use their expertise to detail every particular about the item currently on offer. This replaces the need for buyer/seller interaction for the purpose of gathering additional information. They will show the equipment/car working, they will provide provenance, documentation, authentication, immediately prior to the start of live bidding. The best auction houses never can have the level of expertise on every item their bidders possess, so they have no choice but to make up for this in accuracy and honesty.

    Quote Originally Posted by Chabrenas
    an online one could take only minutes - but that would stop it from being a worldwide event, because of time zones. Interesting trade off.
    This forum has world-wide membership. People adapt as needed. I have stayed awake to engage in active discussions here and have also adjusted my schedule to remotely attend live overseas events. Most members here would probably adjust to attend live business auctions?
    Last edited by KenW3; 10 July 2014 at 10:29 am.

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    There are live auction events online.
    I didn't know about them until I read an article in a newspaper today, where a woman described buying a classic car that way. I'm definitely falling behind - future shock is getting to me.

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    Quote Originally Posted by Chabrenas View Post
    However, an online auction of a single item lasts for days instead of minutes. If all DD were completed before the auction started, an online one could take only minutes - but that would stop it from being a worldwide event, because of time zones.
    Interesting point. It would work well with websites. Keep the listing details public for 30 days during which people do their DD and then run the auction at a set time after the expiry of the 30 days. However, in Flippa's case that kills some of the buzz. People seem to like to keep tabs on how many buyers are bidding, how many folk are "watching" the auction etc. And they seem to want to discuss in the comments section various matters including how the bidding is progressing.

    It's a bit of a circus and a method not really suited to selling quality businesses. Discreet items like antique vases or used computer games lend themselves well to such a format, but complex businesses with a lot of moving parts are typically sold via detailed private negotiations and the price paid is hardly ever just one lumpsum in cash - there are numerous clauses to the contract of sale and the price is dependent on the wording of those clauses, the schedule of payments, the extent of seller financing, buyouts, interest rate being charged, the quality of the security being offered etc. But for the typical sites being sold in Flippa the Flippa system seems appropriate.
    Find the right business brokers to maximise the value you extract from your business and improve the chances of selling your business.

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    Quote Originally Posted by Clinton View Post
    It's a bit of a circus and a method not really suited to selling quality businesses. Discreet items like antique vases or used computer games lend themselves well to such a format, but complex businesses with a lot of moving parts are typically sold via detailed private negotiations and the price paid is hardly ever just one lumpsum in cash - there are numerous clauses to the contract of sale and the price is dependent on the wording of those clauses, the schedule of payments, the extent of seller financing, buyouts, interest rate being charged, the quality of the security being offered etc. But for the typical sites being sold in Flippa the Flippa system seems appropriate.
    That's always been my thought about auctions of websites, too. In the real world, I have been involved in a few transactions where businesses were sold by the investment bankers in an auction-like process. I say "auction-like" because while they called it an auction it was really more of a controlled sale to a limited number of pre-qualified buyers who were able to do their full due diligence during the pre-auction period. Also, another key difference was that there was no active bidding; each bidder gave a sealed bid and the highest bid won. Even then, in the deals I saw there was still a fair amount of back-and-forth after the bid was accepted.

    I haven't seen an auction like that for nearly 20 years, though. I think as the cost of due diligence in a business setting increased (with things like environmental studies and review of financial and accounting records by outside auditors), buyers were less willing to incur those costs on the off-chance that they might win the bid. If there aren't enough buyers willing to go through the expense and hassle of participating in the auction, the lack of competition will not yield the best price for the seller.

    I'm sure there are still probably a few companies sold through a modified auction process but in most cases that is simply not the way for a seller to get the best price. I think the same is true of a selling a substantial website through an auction like Flippa, at least if buyers are making a well-reasoned decision. The inability to get answers to all the questions a buyer SHOULD ask means that the transaction has increased risk to the buyer. Increased risk should be reflected by the buyer in a lower price to compensate for the risk.

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    I haven't seen an auction like that for nearly 20 years, though. I think as the cost of due diligence in a business setting increased (with things like environmental studies and review of financial and accounting records by outside auditors), buyers were less willing to incur those costs on the off-chance that they might win the bid.
    ...and yet that is exactly the way companies have to bid for major government contracts - and still risk having part of their payment stopped if, for once, they make an exceptionally high profit. Prices have to reflect the risks involved, and when the sum involved is both large and politically sensitive, those risks are high. luckily, web-based businesses don't normally fall into this category. Imagine the fun we'd have if a government decided to outsource the UK Driver & Vehicle Licensing system as a fully online system...

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    Spot on about the process, David. Thanks for sharing your experience.

    If there aren't enough buyers willing to go through the expense and hassle of participating in the auction, the lack of competition will not yield the best price for the seller.
    Hmm. I'm not so sure about this. Large companies often have only a single potential buyer and still achieve their strategic goal of a merger/sale. In fact, the same could be said of an IPO. OK, there are multiple parties buying shares, but it's at a pre-decided company valuation and there's no competitive bidding. Would you expect that even in those scenarios a competitive bidding process would have resulted in a better price?
    Find the right business brokers to maximise the value you extract from your business and improve the chances of selling your business.

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