What it means
An auction house does not usually own what it sells. It acts as an agent, valuing items, marketing them, running the sale and collecting the money.
Its job is to bring together enough interested buyers to achieve the best possible price for the seller. Income comes from two main sources: a commission paid by the seller, normally a percentage of the hammer price (the final bid at which the item is knocked down), and a buyer's premium, an extra percentage added to the hammer price.
Rates differ from house to house. There may also be added charges for insurance, photography and taxes.
Auction houses also provide valuation services for insurance, probate and tax purposes. These are important to professionals such as solicitors and accountants, because an inheritance tax bill or an insurance claim depends on a credible value.
A well-known auction house carries weight when it signs off on a figure. From a finance perspective, auctions are a way for collectors to convert illiquid assets into cash.
Art and antiques cannot be sold as quickly as shares, and prices can swing sharply depending on who is in the room. Owners sometimes agree a reserve price, which is the minimum at which they are willing to sell, to protect themselves against a weak sale.
The business has features that finance teams study closely. Revenue is lumpy and depends on the quality of consignments, costs include staff, premises and marketing, and reputation is the main asset.
A few exceptional lots can transform a year's results. Specific commission rates and sale results should always be checked on the auction house's own published terms, as they change over time.
The figures used in this entry are assumptions chosen to make the arithmetic clear.
In practice
Real-world examples.
Example
A family inheriting a collection of Scottish silver asks an auction house for a valuation for probate. The written valuation is used by the executors to report the estate to the tax authority and later forms the starting point for the sale.
Example
A collector wants to sell a painting but fears it will fetch less than he paid. He agrees a reserve of $40,000 with the auctioneer, so if bidding stops below that the painting is returned unsold and he avoids a loss.
Example
An insurance broker commissions a replacement-value appraisal for a client's jewellery. The auction house's specialists report current market values, helping the client avoid being underinsured by thousands of dollars.
Formula
Calculation
Auction house income = (Hammer price x Seller's commission rate) + (Hammer price x Buyer's premium rate)
Assume, for illustration, that a painting sells for a hammer price of $50,000, with a buyer's premium of 25% and a seller's commission of 10%. The buyer pays 50,000 + (50,000 x 0.25) = 50,000 + 12,500 = $62,500. The seller receives 50,000 - (50,000 x 0.10) = 50,000 - 5,000 = $45,000. The auction house keeps 12,500 + 5,000 = $17,500, which is 35% of the hammer price.Case study
Seen in the real world.
Thistlegate Auctioneers is an illustrative, fictional regional auction house similar in type to well-known firms. In a typical year it sold lots worth $20,000,000 at hammer price and earned a combined 30% in seller's commission and buyer's premium, giving revenue of $6,000,000. Costs ran at roughly $5,000,000, leaving a modest margin.
One sale included a rediscovered painting that sold for $1,500,000, far above its estimate of $200,000. The extra commission lifted profit by more than $400,000 in a single afternoon. The fictional finance director warned the board not to budget on such luck, and she kept the forecast tied to average results, using the windfall to build a reserve.
She also noted that the best results came from marketing. Sales that were promoted to specialist collectors attracted more bidders, and the fictional board agreed to spend an extra $150,000 a year on cataloguing and photography because it raised average prices.
Watch out
Common mistakes.
- Assuming the hammer price is what the buyer pays, when the buyer's premium and other charges are added.
- Treating auction estimates as guaranteed prices, when they are only guides and the final price depends on who is bidding on the day, the condition of the item and the general mood of the market.
- Forgetting that sellers pay commission, so the cheque received is lower than the hammer price.
Questions
People also ask.
What is the hammer price?
It is the final bid accepted by the auctioneer when the item is knocked down, before premiums and other fees are added.
What is a reserve price?
It is the minimum price at which the seller is willing to sell, and if bidding does not reach it the lot is not sold.
Do auction houses own the items they sell?
Usually not, because they act as agents between sellers and buyers, taking a fee for their services, though in some cases they guarantee a minimum price and take on risk.
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