Our experienced team provide market insights and news on the Asset Advisory and Auction industry.

Guarantees and Auctions: Are You Getting Value?

Posted 31 March 2016
  • The value of a guarantee is dependent on your circumstances
  • The guarantor selling agent must not take ownership or title to the assets being guaranteed
  • If you have a strong working partnership with a sales agent and know their track record, a guarantee may be unnecessary
  • Measure sale results against an independent valuation to mitigate the risk of any future complications.

We have been asked by a number of banking and finance clients in recent times about whether there is value in obtaining a guaranteed minimum amount for assets sold at auction.
Guarantees are not new. Various sales agents and auction houses have offered guarantees in different forms over the past 2 to 3 decades. It is however relatively new to see guarantees in the context of offering assets on behalf of banking and finance clients.

In short, there is no clear cut answer as to when a guarantee may be of value. Instead, the asset type, the vendor’s circumstances and their objectives will largely be the driver behind whether a guarantee may be appropriate.

ST 17th June Auction 016 a

How does it work?

Simply, a guarantee is where the sales agent underwrites or guarantees a base value for an asset. Should an asset sell for below the guarantee, the auction house will make up the difference between the sale price and the guaranteed amount. Where the asset sells above that value it is sold per normal sale conditions.

A guarantee will always have an associated cost to cover the risk with offering the guarantee. How that charge is structured is variable. More common fee structures for a guarantee include; a percentage of the final sale price, a percentage of the valuation amount on the asset, a percentage share in any uplift above the guarantee amount or may be an agreed fixed fee. The fee for a guarantee is in addition to any agreed sale fee structure.


There are a number of considerations to be conscious of when considering a guarantee in the context of a liquidation or sale of repossessed assets.

Is there value in the guarantee? – The answer to this question is largely dependent on the circumstances of the vendor seeking the guarantee.

Owners and operators of equipment appreciate the certainty that a guarantee offers by ensuring there is a known return. This is particularly appreciated where an owner can be short on cash flow and needs a definite return.

We have received feedback from some of our banking and finance clients that they also appreciate having a minimum guaranteed return, which allows them to more accurately make provisions for bad debt or more accurately represent a minimum return to creditors. Having this assurance on a minimum return can give an insolvency practitioner more confidence to pursue a particular course of action.

In contrast, we have had other banking and finance clients dismiss these factors due to the guarantee not being aligned enough with what the provision may need to be and the potential to have to write back a provision where the return exceeds the guarantee. One banking client commented that he felt “it is like buying insurance that I don’t need. The market will be the market and I don’t want to reduce my return with the associated cost”.

Another factor to bear in mind regarding the value of a guarantee is in relation to the associated fee structure and how that impacts on the net outcome. For Example: An 80% guarantee on a package of assets valued at $1,000,000 (guaranteed amount $800,000) with a charge of 2% for the guarantee on the guaranteed amount ($16,000) and a 5% commission ($40,000) will have a net return of $744,000. The guaranteed return to the client is in effect only approximately 74%.

A further consideration was highlighted in our discussions with specialist restructuring and insolvency lawyers who noted that from a recoveries perspective a guarantee does expose the bank to an argument (when the bank seeks to recover the shortfall and the asset has sold for above valuation) that the guarantee should not have been entered into and the customer may refuse to pay that additional indebtedness attributed to the cost of the guarantee.

An argument could easily be made that the expenditure was not necessary and the customer could quite rightly ignore the benefit to the bank in other instances where the guarantee is called upon.

dump truck - transport

Who did the valuation? – In most cases where a guarantee is given to an owner or operator of an asset, generally that owner has quite a good sense of what an asset should be worth or what they are looking to achieve with the sale of the asset. The guaranteed amount can then be negotiated as there is a balanced power relationship in the negotiations of the guarantee.

In the case of a sale process by liquidation or the sale of a repossessed asset, the valuation is often conducted by the same company offering the guarantee. Where a file manager with little knowledge around the assets or asset class in question is relying on that valuation, there is a power imbalance and they may not be in a position to understand completely the value of the guarantee.

Any result that is significantly above the guaranteed amount could be an indication that the valuation was ‘lowballed’ and therefore the guarantee not as valuable. Should an agent continually achieve significantly above valuation, this could indicate that an agent is offering a guarantee to secure an engagement whilst mitigating their risk by reducing their valuation.

If agents are not held to account on the actual results verse the valuation amount, whether significantly below or above the valuation, this could encourage poor practices to become widespread.

An agent’s past performance on actual sales results against their valuation should be considered like a reputational guarantee.

Recommendation – Where a file manager may have little experience in a particular asset class and the value of the asset is material, we would recommend obtaining a formal valuation (sight unseen valuations are insufficient) from an independent valuer before contemplating the costs associated with a guarantee.

Feedback we have received within the legal fraternity has queried whether an independent valuation would be sufficient to resolve this conflict and instead suggested that the sales process may need to be run by a completely independent agent.

Who does title transfer to if the guarantee is called on? – It is not always clear or agreed as to who is allowed to take title for an asset should a guarantee be called on. A true guarantee will sell the asset in question to the highest bidder (being an unrelated party to the guarantor) with the guarantor tipping in the difference between the sale price and the guaranteed amount.

It is not uncommon however that the guarantor, being required to contribute funds to reach the guaranteed amount, becomes the highest bidder and therefore will take ownership and title of the asset. Recognising the potential for a conflict of interest, this circumstance is less problematic where the vendor is a private seller as the asset sold at a well attended public auction subject to a contract and the guarantee was called upon.

This is not so clear cut however in the case of a banking or finance vendor. The duties of a financial controller under section 420A of the Corporations Act are well known, that is that a financial controller must not sell an asset for less than market value.

Should a guarantee be called on and title pass to the guarantor, there is scope for that asset to be re-sold for a higher amount at a later point in time and the guarantor to make a profit (note there is also scope for the guarantor to sell for less and further exacerbate any loss).

The concern for a banking or finance vendor is only on the upside however, as there is a clear sales history from the first to the second sale that may facilitate a challenge as to whether market value was achieved during the first sale. It could be argued that the asset should have been re-offered to the market a second time and that the asset was sold for less than market value at the guaranteed amount.

Of greater concern in these circumstances, however is the possibility that the bank may be exposed to reputational damage where the guarantor takes ownership of the asset. The perceived conflict of interest, which prima facie may appear to have prejudiced a bank customer, could easily be picked up in the mainstream media raising reputational issues for the bank or financier.

Recommendation – it should be very clear that the guarantor or any related parties of the guarantor selling agent must not take ownership or title to the assets being guaranteed.

Screen Shot 2016-03-30 at 2.17.57 pm


Valuations are an inaccurate science and always more challenging where the assets are specialised or unique (in which case, a guarantee is unlikely to be offered or will be offered at a much higher rate to reward the associated risk).

Where the assets are not specialised and more “vanilla” such as trucks or trailers the risk in the guarantee is fairly low. An agent should have sufficient expertise and there should be sufficient comparative sales data to undertake a valuation with an accuracy of within a 20% margin of error. This then raises the question of the value to the vendor of a guarantee at this level.

An “outstanding result” that is significantly above valuation or a terrible result below valuation is indicative of the skills and experience of the firm itself rather than the quality of the sales results. A prior track record by a firm on sales results verse valuation should be a good indicator as to the likelihood of an outcome and the value of a guarantee.

Ultimately, the value of a guarantee is dependent on your circumstances. If you have a strong working partnership with a sales agent and know their track record, a guarantee may be unnecessary. If the agent is new to you, it may offer some comfort around outcomes, just be sure to measure the results against an independent valuation and take the measures outlined above to mitigate the risk of any future complications.

We would be more than happy to discuss the above thought piece with you and any of your colleagues to ensure all considerations about this topical issue are addressed.

– Tim Slattery, Director