What Is FMV-Based 100% Consignment?

In this approach, assets that are not critical to the business’s ongoing operations—such as surplus equipment, unused property, or old vehicles—are excluded from the purchase price. Instead, the seller consents to allow the buyer to sell these assets on their behalf. The proceeds from the sale, based on the fair market value (FMV), are then returned entirely to the seller.

 

Why Use FMV Consignment?

This strategy provides several benefits for both buyers and sellers:

 

For Buyers:

 

• Lower Upfront Costs: By excluding non-essential assets from the deal, buyers can reduce the initial cash outlay required for the acquisition.
• Flexibility: The buyer gains control over the consigned assets during the sale process, ensuring they can manage the timing and approach to liquidation.
• Focus on Essentials: It allows buyers to concentrate their financial resources on the core operational assets and working capital needed to run the business.

 

For Sellers:

 

• Monetization of Idle Assets: Sellers can extract value from non-essential assets without delaying the sale of the business.
• Simplified Sale Process: This method separates the negotiation of operational assets from non-essential items, reducing complexity.
• Full Proceeds: Sellers receive 100% of the sale proceeds, ensuring they get fair value for their carved-out assets.

When to Use FMV Consignment

 

This strategy works best in the following scenarios:

 

1. Presence of Idle Assets: If the business has non-inventory assets that are underutilized or unnecessary for ongoing operations.
2. Seller’s Willingness: The seller must be open to carving out these assets and trusting the buyer to sell them at FMV.
3. Buyer’s Resourcefulness: The buyer needs to have the expertise or network to effectively market and sell the consigned assets.

How FMV Consignment Works

 

• Identify Non-Essential Assets:
  • Review the seller’s balance sheet and physical inventory to identify assets that are not critical to the business.
  • Examples might include surplus machinery, outdated equipment, unused vehicles, or excess furniture.

• Determine Fair Market Value:
  • Conduct appraisals or research market trends to establish a realistic FMV for each asset.
  • Ensure transparency between buyer and seller to avoid disputes about valuation.

• Carve Out Assets from the Deal:
  • Exclude the identified non-essential assets from the purchase agreement, clearly documenting them in a separate schedule.

• Draft the Consignment Agreement:
  • Outline the terms of the consignment, including the buyer’s responsibility to sell the assets and the seller’s right to receive 100% of the proceeds.
  • Specify the timeline for sales and reporting.

• Sell the Assets:
  • The buyer markets and sells the consigned assets, leveraging auction platforms, industry-specific marketplaces, or direct sales.
  • Transparency is key—keep the seller informed of the progress and ensure proceeds are distributed promptly.

• Transfer Proceeds to the Seller:
  • Once assets are sold, the buyer remits 100% of the proceeds to the seller, fulfilling the consignment agreement.

Real-Life Example: A Manufacturing Business Sale

 

Imagine a scenario where you’re acquiring a manufacturing business. During due diligence, you notice a warehouse filled with unused equipment, including outdated printing machines and surplus forklifts. These items aren’t essential to the company’s operations and would only add to your acquisition cost without providing immediate value.

 

Rather than buying these assets as part of the deal, you negotiate with the seller to carve them out. The seller agrees to consign the equipment to you, allowing you to sell it on their behalf. After researching the market, you determine the equipment’s FMV to be $150,000.

 

Post-acquisition, you list the equipment on specialized auction sites and negotiate private sales, generating $145,000 in proceeds, which you transfer to the seller. The deal benefits both parties: you save on upfront costs, and the seller monetizes their idle assets without complicating the transaction.

 

Benefits of FMV Consignment in Business Acquisitions

• Optimizes Deal Structure:
  • Separates essential and non-essential assets, simplifying negotiations.
  • Focuses financial resources on what matters most for operational success.

• Increases Transparency:
  • Clearly outlines how non-essential assets will be handled, reducing potential conflicts post-closing.

• Builds Trust:
  • Demonstrates good faith by ensuring the seller receives full value for consigned assets.

• Encourages Creativity:
  • Opens the door to more flexible financing and deal-making strategies.

Closing Parable: The Market Vendor

 

A farmer preparing to sell their land realized they had a barn full of old tools and equipment. Some were outdated, others unused for years, but all had value to the right buyer. Instead of bundling the tools into the sale of the farm and lowering the price to compensate, the farmer decided to hold a weekend market, selling the items piece by piece.

 

Buyers from nearby towns came to the market, and the farmer walked away with far more than if they’d included the tools in the farm sale. The land sold separately, and the farmer achieved their financial goals with minimal effort.

 

The lesson? Every asset has its value, but not every asset belongs in the deal. By separating the essentials from the non-essentials and managing them strategically, you can maximize outcomes for everyone involved.

 

Final Thoughts

 

FMV-based consignment is a powerful tool for structuring creative, win-win business acquisitions. By carving out non-essential assets and leveraging their value independently, buyers can reduce upfront costs while sellers monetize idle resources.

 

The key to success lies in transparency, clear agreements, and diligent execution. Whether you’re buying your first business or navigating a complex acquisition, this strategy offers a flexible, innovative way to create value for both parties.

 

Remember, in every deal, it’s not just about what you’re buying—it’s about how you’re buying it. Creative solutions like FMV consignment can make all the difference in achieving a successful, sustainable transaction.