If you are an entrepreneur or an owner of a small business you can relate to the pressure of short term funding requirements. Most entrepreneurs have had to bootstrap for that extra couple of months till the funding deal closed and a majority of small businesses have faced delays in invoice payments.
We came across one such gentleman recently who had quit his banking job and embarked on a technology venture. He had invested his own money initially and was in advanced stages of discussion with a venture capital firm for funding the venture. Unfortunately the due diligence lasted longer than he had anticipated and he ended up selling a contemporary landscape painting that he had only recently bought - a decision that he still regrets.
He sold the paintings through a reputed auction house and received less than 40% of what he had bought it for. That is not because the artist had become any less desirable. His paintings still retail for similar prices. This is simply how the market works if one has to sell their personal possessions quickly. He was in fact lucky to get as much as he did.
Here is how it works. The margin of a typical art gallery is 40%-50% and so in an average auction sale, unless you are lucky to get two people bidding against each other, buyers are unlikely to pay more than 60% of the price you paid for it. Assuming the retail price of the painting is £15000, buyers will not pay more than £9000. That will equate to a hammer price (the price at which it is recorded as ‘sold’ at auction) of £6900 after accounting for the 25%+ VAT in buyer’s premium payable to the auction house. There is another 12.5% + VAT to pay as the seller's premium and finally the seller will get only £5900. So, if the market for the artist has not changed and you want to sell a painting at an auction quickly, the best you can hope for is 40% of its gallery price!
| Stage | Fees/Margin | Net Realisation |
|---|---|---|
| Gallery price (full retail) | £15000 | |
| Cost to buyer less Gallery margin | (40%-50%) | £9000 |
| Hammer price less Buyer's premium | (30% incl. VAT) | £6900 |
| Seller receipt less Seller's commission | (15% incl. VAT) | £5900 |
Was there a better choice available to him? Absolutely. He could have borrowed £4000 from a personal asset finance lender such as Unbolted. If he had borrowed from Unbolted he would have paid about £615 in fees and charges over six months compared to the £9,000 he lost by selling it in a rush. And if he really did not want the painting any more, he would have been much better off looking for a buyer privately while managing his short term cash flow issue with a loan. It does not pay to sell the painting, or for that matter, any personal asset in haste!
