NAFA s Fleet Acquisition and Disposal Guide. F. Disposal

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1 NAFA s Fleet Acquisition and Disposal Guide F. Disposal How Dispose? Sell Self Employee Sales? Outsource Retail? Wholesale? Introduction Eventually, each of the 240 million vehicles operating in the United States and Canada is circulated back through the marketplace for resale to consumers. This may take the form of disposals for salvage, wrecked or inoperable vehicles, remarketing of still operating vehicles through multiple channels, or donating vehicles to charity. Supply and demand are the key factors that ultimately determine the depreciation experienced by a fleet. This applies at both the front end (vehicle acquisition price) as well as the back end (ultimate resale price). Fleet managers should recognize that what they purchase, when they purchase it, the options selected, etc., all impact the value of the vehicle at initial purchase and significantly influence the resale value later when the vehicle is sold. While fleet use is a key factor when selecting vehicles, also keep in mind the retail market and what is demanded from that market. Some fleet managers may think that getting the best initial price when purchasing a vehicle is ideal. However, this is a dangerous practice because resale NAFA s FADG Disposal F-1

2 values/depreciation are impacted by the make, model, series, color, option content, and, very importantly, vehicle incentives. Supply and demand in the market affects these factors (i.e., manufacturers don t normally place incentives on strong-selling vehicles, which will typically retain a greater percentage of their initial acquisition price). The supply side of vehicle remarketing is drawn from a combination of many sources. Off-lease vehicles are units turned in at the end of a lease term. Repossessions are vehicles recovered from individuals who can no longer afford or want their vehicles. Dealer trades are vehicles from new- or used-car retail customers. Manufacturers are the source of program vehicles. Salvage, wrecked, or inoperable vehicles are also counted in the mix of units bought and sold for parts. Because vehicles depreciate in value over time, effectively managing fleet vehicle inventory is crucial to the remarketing process. Inventory management anticipates and resolves potential problems that may inhibit the timely resale of end-of-service vehicles. These factors can include such difficulties as title/ownership problems, missing sale documents, unresolved mechanical issues, missing transport, and lost or unaccounted for units. Fortunately, advances in information technology now provide many tools to track vehicles, monitor their status, location, and condition, assess damage and approve repairs, and create accurate reports. Keeping track of these details and documenting the out-processing activities at each stage greatly reduces the likelihood of unnecessary, costly delays at time of resale. a. When Should a Vehicle be Remarketed? Vehicle age is a critical factor in fleet remarketing. The longer the vehicle remains outof-service/off-lease and unsold, the lower its resale value. An accepted goal for timely vehicle remarketing is resale within 30-days of end-of-service. Vehicles continue to depreciate even when not in service. Also, delays may place vehicles in a declining market where the average value drops weekly, or even daily, as competing vehicles saturate a seasonal market. Time really does equal money in this case and the losses can be substantial. To achieve this goal, begin preparing a vehicle for remarketing well in advance of its end-of-service date. Confirm title/ownership accuracy and assemble vehicle history records. Resolve issues that may delay or hinder the remarketing process. While some aged inventory may be unavoidable, the percentage of vehicles past the 45-day point following end-of-service should be no more than 5 percent of the total fleet portfolio. b. Remarketing Channels Fleet managers who understand the remarketing channels available to them and employ well-planned remarketing tactics greatly enhance the potential of realizing maximum resale values. A wide variety of remarketing channels are available to fleet managers. Understanding the advantages and disadvantages of each will help F-2 NAFA s FADG Disposal

3 Fleet Acquisition and Disposal Guide Disposal determine which channel to use for specific vehicles within a fleet. These channels include: Driver and employee sales Dealer trade-ins Upstream/online remarketing Wholesale remarketing Internal auctions Outside/commercial auctions Reputation is a key intangible asset in successful vehicle remarketing. Full and proper disclosure, fair-market pricing, professional business conduct all help create integrity in the marketplace. A positive reputation provides buyer confidence and draws repeat business. Most fleet and remarketing industry associations have established ethical guidelines and business practice standards to maintain a marketplace in which all parties can participate with confidence. Section 1: Overview Your fleet s replacement policy is one of the most important decisions you have as a Fleet Manager. It must advance your employer s priorities, including financial and nonfinancial considerations, and keep your depreciation and unscheduled maintenance costs to a minimum. Depreciation is your number one expense, so fleet managers must keep a vigilant eye on how their vehicles are sold and use innovative approaches to achieve the highest possible sale proceeds. Regardless of how you dispose of your vehicles, each vehicle sale should be audited to ensure such items as end-user condition reports match the description of the vehicle when it was sold, that sale proceeds are in line with industry benchmarks, and that this was the most efficient way to dispose of the vehicle(s). Depending upon the size of your fleet and number of vehicles sold annually, vehicle sale proceeds can significantly affect your bottom line, either positively or negatively. It is up to you to market your vehicles effectively, use the disposal method resulting in the greatest residual return, ensure all legal issues are addressed, and continually analyze your disposal function. Fleet replacement policies are most effective when also teamed with a fleet remarketing policy. While a replacement policy can set the guidelines of what to acquire at the most opportune time, the remarketing policy sets the guidelines in actually determining the opportune time. Elements of both policies will overlap, but they should not just restate information, they should compliment each other. As an example, the replacement policy may indicate which sedans are the best for a sale force, but the remarketing policy may show when and where the old sedan in the fleet should be sold. NAFA s FADG Disposal F-3

4 Fleet managers can certainly have a replacement policy with no remarketing policy, but when both policies are clearly defined, the fleet manager can maximize both the acquisition dollar being spent and the sales dollar being realized. Section 2: Vehicle Resale a. Factors Influencing Resale Value There are many factors that may affect the resale value of your used vehicles, and many of them should be addressed when purchasing the vehicle. Issues like model, color, and options should be considered when developing vehicle selector lists. Even issues such as 6 cylinder versus 8 cylinder engines and 5-passenger vans versus 7-passenger vans should be addressed in terms of resale value. Keeping abreast of market trends and reviewing survey results, like those from the National Association of Fleet Resale Dealers, is important in this respect. 1. Make and Model Vehicle makes and models that are popular with the public will command higher resale values than those vehicles that are not popular or not typically seen on the nation s roads. Exceptions to this rule may be certain classes of executive vehicles or specialty vehicles for unusual applications. As a general rule: What sells good new, sells good used. However, it is also important to remember that incentives offered on different makes and models impact brand equity. Fleet managers must capitalize incentives into the cost of a vehicle. According to the Automotive Lease Guide (ALG), the gap between MSRP and transaction price on new vehicles sold is growing wider since 2001 due to the continuation of heavy manufacturer s incentives. This gap is having a negative impact on brand equity. 2. Age The older a vehicle is, the less it is worth and the less it will command in sales proceeds. If a model has experienced a major makeover since your entity purchased it, the difference makes the sale vehicle even less desirable. Additionally, older vehicles do not have the advantage of emerging technology in the areas of fuel economy and safety over the vehicle s age, and may cause a drop in value at the time of sale. Lastly, buyers of older vehicles may have difficulties obtaining financing prompting lower return cash sales. 3. Mileage Higher mileage indicates greater use of the vehicle. Although used vehicles today average higher miles than used vehicles years ago, the fact remains that higher mileage vehicles will result in lower sale proceeds. Factors that will help alleviate some buyer concerns are assurances that the vehicles have not been involved in an accident and complete maintenance records are available showing that all services were performed on time. As a rule, diesel engines are capable of logging many more miles before they develop problems like their F-4 NAFA s FADG Disposal

5 Fleet Acquisition and Disposal Guide Disposal gasoline counterparts, so be sure to indicate a diesel engine when applicable. You should also be concerned with the mission the vehicle was used for. Some law enforcement and emergency vehicles and larger trucks may have been in use for many more hours than their odometer would indicate because of special purpose equipment requiring engine operation. 4. Condition You should pay attention to what may be considered normal wear and tear for a vehicle s age and mileage versus major dents, upholstery tears, and cosmetic defects. What might be considered acceptable for a vehicle with 100,000 miles could be considered excessive on a vehicle with only 40,000 miles. Based upon estimated additional proceeds, you may wish to have the vehicle detailed, repair minor dents, repair a tear in the upholstery, or even re-paint the vehicle. You should weigh these options carefully, assuring that the cost of all repairs and administrative time will result in greater proceeds. 5. Options Buyers of your vehicles will expect vehicle accessories commonly found on similar vehicles for sale elsewhere. Vehicles without desirable accessories, such as CD players, air conditioning, cruise control, tilt steering, anti-lock brakes, or even popular exterior colors will most likely reduce the vehicle s sale proceeds. There is little you can do in this respect when selling vehicles; however, you should keep these types of options in mind when selecting vehicles for your fleet. The following are two good examples of how options influence resale. According to a National Association of Fleet Resale Dealers (NAFRD) 2001 member survey, a three-year-old, seven-passenger van earns an additional $729 in resale versus a five passenger van. Likewise, a diesel engine in a three-year-old pickup commands $1,075 more in resale than a same model, same age pickup with an 8-cylinder gas engine. An option that can really make or break a good resale is color. According to NAFRD, a good color earns an additional $478 at resale, while a difficult color decreases resale by an average of $542. Some suggestions for improving resale value based on color are: Avoid black for vehicles remarketed in the South or Southwest, Avoid white in snow belt areas, White cargo vans have a higher resale value, Some metallic paints are less desirable due to difficulty in matching color when repainting, Gray interiors sell best with white exteriors, with silver exteriors being second, Tan interiors sell best with tan exteriors, with white exteriors being second, NAFA s FADG Disposal F-5

6 Difficult colors to sell include yellow and purple, Easiest colors to sell include white, red and tan. 6. Maintenance Level Having vehicle maintenance records available for disposal vehicles will usually boost your vehicle proceeds, providing that they show the vehicle was properly maintained and serviced. Vehicles that are not properly maintained, or have needed repairs deferred because of disposal, will command less money at resale. All vehicles should be in sound and safe operable condition before offering then for sale, unless it is economically unfeasible to do so. 7. Geographic Location You should review recent sales analysis of used vehicles in your area to see if they are returning lower sales proceeds than expected. Some parts of the United States and Canada routinely produce lower proceeds, while seasonal weather conditions in some other parts keep potential buyers away. To counter these situations, some fleet managers transport vehicles to other cities to be sold. You should weigh this option carefully, as the cost to transport and house such vehicles could easily overcome any increased sale proceeds. 8. Time of Year Vehicles should be disposed of as soon as possible after the replacement vehicle is received and put into service. Remember that the vehicle continues to depreciate even if it is not being used. Additionally, the longer you wait to sell a vehicle, the older it will be and the less you will realize from the sale. If possible, always sell vehicles before new models arrive in the marketplace to avoid making the vehicle seem older than it already is. It is generally agreed that the best time of the year to dispose of vehicles is between September 15 th and November 15 th when new model year vehicles are being introduced. The second best time of the year is between February 15 th and June 15 th. It is also generally accepted that the weakest market for used vehicles is from November 15 th through February 15 th, followed closely by the July 15 th through September 15 th timeframe. 9. Fleet Users If your operations permit, vehicles should always be assigned to designated users for the life of the vehicle if you plan to offer vehicles to drivers. A dedicated driver is more likely to take better care of their vehicle and is more likely to buy it once it becomes available for purchase. Vehicles that are used by many drivers are usually not as well maintained and command lower sale proceeds when sold to employees. F-6 NAFA s FADG Disposal

7 Fleet Acquisition and Disposal Guide Disposal 10. Market Glut Sometimes, too many vehicles of the same type or model you need to dispose of are already on the market in your area. When this happens, overall prices of all similar vehicles will usually drop. A similar issue that will negatively affect the sale proceeds of used vehicles occurs when vehicle manufacturers offer large rebates on their new vehicles, making them more appealing than used vehicles (unless the used vehicles are severely discounted). To counter these market conditions, it may be necessary to transport used vehicles to another city or region if increased overall sale proceeds can be realized by doing so. Another way to look at market glut is the law of supply and demand. Vehicle makes and models that are popular with the public will command the highest price at resale. Makes and models that are passing fads will realize a low resale price as the fad may have already passed by the time the vehicle is back on the market. It is critical for fleet managers to recognize that vehicle selection, purchase timing, option content, etc., all impact not only the initial cost of the vehicle, but also its future resale value. While fleet use is a key factor when selecting vehicles, the retail market and what is demanded from that market are also significant. Some fleet managers may think that getting the best initial price when purchasing a vehicle is ideal. However, this is a risky practice because resale values and, ultimately, depreciation, are impacted by the make, model, series, color, option content, and, very importantly, vehicle incentives. Supply and demand in the market affects these factors. 11. Obtaining Price Comparisons You can get a good idea of how much your vehicles may sell for by obtaining price comparisons of similar vehicles being sold in your area. You may wish to alter the timing of your disposals or the location of sales if your analysis indicates that you could achieve higher proceeds by doing so. You might also check the realized and projected sale values of certain vehicle models prior to acquisition to limit the possibility that you will be selling vehicles with limited revenue potential in the future. 12. Other Influences Keep in mind that other factors also influence resale value, most notably usedvehicle interest rates, particularly subprime. Model-year changes of new body style or all-new replacements also influence the value of the used vehicle. Keeping the entire picture in mind when researching the remarketing process will help to maximize sale proceeds. NAFA s FADG Disposal F-7

8 b. Condition Reports Always make a detailed inspection of vehicles prior to selling them. This applies even to employee sales when additional repairs or detailing will probably not be done. Condition reports should be completed and pictures taken. These will then be used to document the vehicle condition and to market the vehicle. When employee sales are used, someone other than the vehicle operator should sign off on these reports. c. Vehicle Appraisals Certain specialized types of equipment may warrant a professional appraisal to ascertain the correct value you will be seeking. Professional appraisers take into consideration such issues as current book value, sales comparisons, the market for such equipment, and value of future use. Appraisers also analyze assets to determine what its remaining useful life is. Since there may not be enough of certain types of used equipment in the market place, fleet managers may not always know the best price to expect, thus some equipment may be sold for a much lower proceed than what might be possible. As a result, you may want to explore the idea of using appraisal services for some of your specialized vehicles and equipment to know what they are really worth. d. Developing a Flexible Policy Whatever vehicle replacement policy you develop, you should remain flexible to react to different market conditions and the economy. What worked well in past years may change this year. The rule here is to look at what worked well in past years, what problems occurred, compare your present disposal responsibilities to past years, and review current market conditions to develop policies that achieve you company s goals. Section 3: Remarketing Remarketing policies vary from company to company, depending on corporate philosophy, strategic goals, and financial position. However, maximizing profits from the sale of a vehicle is the ultimate goal when developing a remarketing policy. There are many factors to consider and which may already be covered somewhat in a replacement policy, but the policy should focus on remarketing issues only in order to set parameters for vehicle selling. a. Timing/Cycling There probably is no set answer to when you should replace vehicles because of the many variables involved, including different models, vehicle use, company policies, and market trends. The best tools you can use to figure this complex timing is to know your fleet and what it is used for, employ lifecycle analysis tools, and stay abreast of market conditions. However, that is not to say that there are not some industry averages on this issue. F-8 NAFA s FADG Disposal

9 Fleet Acquisition and Disposal Guide Disposal Most fleet managers dispose of their vehicles either to get the most resale value from them or to get the most service life from them. Managers concerned with resale proceeds usually replace their vehicles at about months and 60,000 miles (96,000 kms). Managers concerned with optimizing vehicle useful life may run their vehicles for 150,000 to 200,000 miles (240, ,000 kms) before selling them. Please note that these values are for general-purpose vehicles and that special equipment, large trucks, and construction equipment are usually operated for longer intervals. If replacement funds are limited, you may choose to keep vehicles in service for longer intervals than what may be considered prudent. Justifications to upper management for vehicle replacement funds should not only include the benefits of updating your fleet, but also the cost associated with retaining older vehicles in contrast to the cost of replacement. Extending the time vehicles remain in service has implications, some of which are: Advantages: Reduced depreciation No expenditure of capital for new units Lower taxes and license fees (not applicable in Canada) Lower collision repair costs Lower insurance costs Disadvantages: Higher maintenance costs Older vehicle technology, higher fuel costs Safety risks associated with vehicle breakdown, parts failures, and older technology Values decline at a faster pace during weak used-vehicle market conditions Diminished productivity during downtime Lower employee morale Negative image to customers or the public Only you, the Fleet Manager, can judge what will be the best replacement times for your company. Besides using the tools mentioned above, you should study several sales cycles and get a feel of what works for your industry and market. b. Liability on Resale Legal Issues Fleet Managers must be aware of legal considerations when selling vehicles to the public. If you sell vehicles under the pretense of like new, re-manufactured, or rebuilt, you open your company up to various strict liability rules. When vehicles are rebuilt or remanufactured, courts will generally look at the vehicle as a new product and hold you, not the manufacturer, as liable. The key rule here is not to cut NAFA s FADG Disposal F-9

10 corners in the repair process and ensure that all design and safety related systems are operating properly. However, if you are just a passive conduit (i.e., selling a vehicle that has never been modified, rebuilt, or re-manufactured) you will probably not be liable in a strict liability case. Another area of concern is negligence. Failure to exercise reasonable care could result in a lawsuit, and possibly, judgments against you as the fleet manager, and your company. Examples of negligence include failure to respond to product recalls or non-compliance with applicable product safety statutes or regulations. The law assumes that you, as the fleet manager, are aware of these regulations and that vehicles you sell comply with them. Negligence is something that can be avoided because it is a conduct-type allegation. As a rule, to avoid legal implications when selling vehicles, fleet managers need to be aware of your industry and responsibilities, always strive to ensure your vehicles meet applicable standards and regulations, be careful of how you advertise disposal vehicles, and consult your legal representatives whenever in doubt. In general, most fleet vehicles are sold under the condition of as-is. If you are selling a vehicle in as-is condition, make sure it is prominently written on all paperwork that the buyer receives and obtain a written acknowledgment from the buyer that they are accepting the unit in this condition. c. Donations Your company may wish to donate a vehicle to assist charities or civic organizations. These vehicle transfers are treated much like a vehicle sale, with the exception that there are no sale proceeds. However, the same legal and liability issues that are associated with vehicle sales still exist. Fleet Managers should treat donations no different than a vehicle sale, other than to notify your company s finance office so they can effect the appropriate reporting on annual statements and tax reports. d. Public Relations When selling vehicles to the public, you should always be aware of the image you are sending to the buyers of your vehicles. The conduct of vehicle sales, the condition of the vehicles, and resultant administrative or legal issues that arise from the sale will reflect directly on your company s image. Vehicles and equipment should be advertised completely and accurately, and all interactions with potential buyers should be professional and courteous. e. Detailing Minimal detailing of a vehicle, such as washing the outside or vacuuming the interior, is usually necessary on all vehicles. However, you should weigh the added expense carefully of cleaning engine compartments, shampooing carpets, and touching up paint, with any proposed increase in sale value. You should pre-screen sale vehicles and place them in detailing categories based upon the vehicle year, make, model, and condition reports. Be sure that the level of detailing you choose will actually increase the sale proceeds. F-10 NAFA s FADG Disposal

11 Fleet Acquisition and Disposal Guide Disposal Some auctions in the United States and Canada have conducted in-house studies that show in certain areas, vehicle detailing to a showroom ready state may receive higher return on investment than previously thought. If you decide to send your vehicle(s) to auction, check with the auction to see what their experience is with return on a detailing investment. f. Insurance Implications Unless your company is self-insured, fleet managers need to ensure that all vehicles awaiting disposal carry the appropriate insurance until such time as they are no longer operated on the highways. Just as important, you need to ensure that insurance coverage is removed promptly from these vehicles when appropriate. Fleet managers also need to be aware of insurance requirements to cover the company during vehicle inspections and sales. While this generally may fall under your company s liability blanket coverage, you should ensure that the coverage extends to these types of functions. Lastly, fleet managers should ensure that disposal contracts, such as transportation vendors, auction companies, and third party sale entities have adequate insurance coverage to limit your company s exposure. g. Reconditioning Some special purpose vehicles and equipment may warrant reconditioning to extend its useful life beyond normal disposal guidelines in order to obtain the maximum benefit of the asset. Fleet Managers should weigh the costs involved with reconditioning against the costs of a replacement unit carefully. Reconditioning is not repairing parts or systems that are defective, but rather replacing a set number of components and systems to bring the vehicle back to like-new standards. This may involve replacing some components that appear to be functioning perfectly, or strictly cosmetic items. The key here is the lifecycle costs of the reconditioned unit (including lost sale proceeds) versus the lifecycle costs and benefits of a new unit. h. Market Opportunities One of the primary keys to selling vehicles is making the greatest number of potential buyers aware of their availability. Whether you sell your vehicles to employees, through in-house auctions and sealed bids, or through commercial auction entities, marketing your used vehicles effectively is imperative to obtain the highest sale proceeds. Many fleet managers take the approach of prioritizing the opportunity on the basis of incremental financial return to the company. Those opportunities with a high resale value versus a low cost of implementation should be considered before looking at opportunities that may offer less money back in comparison to the higher cost of getting the vehicle to the market. NAFA s FADG Disposal F-11

12 Each of the following topics addresses different methods for disposing of your used fleet. What works for one company in a particular location may, or may not, work for another company. Fleet Managers should review their situation and current market conditions to develop a remarketing strategy that works for their environment. 1. Employee Sales a) Policy Development You should have a comprehensive written policy that outlines your complete program if you choose to sell your disposal vehicles to employees. This policy should be in your company s fleet manual and on your Internet website, if you have one. If you market your vehicles through the Internet, a link should be provided to this policy statement. By providing a clear understanding of all policies and conditions, all stakeholders will know what to expect in the process. Your policy should include, as a minimum: When vehicles will be sold Listings of vehicles Who is eligible to purchase vehicles How vehicles will be marketed Policies on repairs and maintenance prior to sale Warranties (if any) How pricing will be determined Payment terms (certified check, credit card, bank draft, etc.) Financing (if available) Title/ownership and license plate issues A good employee sales program can reap large benefits. Between 25-35% of commercial fleet vehicles are sold using employee sales. This is a good opportunity to realize a fair dollar for minimal investment. According to a recent article in Fleet Financials, selling a vehicle to an employee can realize $500 more than by selling through other channels. b) Excessive Repairs and Maintenance A serious problem that often develops when vehicles are sold to employees is excessive repairs or maintenance in the six months or so before they are sold. When vehicles are close to being disposed of, all repairs and maintenance should be carefully screened to ensure that they are necessary for the vehicle to be safely operated and that they are not being performed just to make the vehicle a better deal for the purchaser. A good indicator of potentially unnecessary repairs or maintenance is how these activities for a specific vehicle compare to similar units in your fleet. Failure to limit unnecessary maintenance will raise your maintenance costs with no corresponding increase in sale proceeds. Items to watch for include: Batteries being replaced with heavy duty models F-12 NAFA s FADG Disposal

13 Fleet Acquisition and Disposal Guide Disposal Tires installed with mileage ratings far exceeding the estimated replacement time Shock absorbers being replaced with heavy duty models Frequent replacement of wear items, like belts, hoses, and wiper blades Minor body work Unnecessary wheel alignments and tire balancing Sudden transmission work or engine overhaul c) Setting Prices Fleet Managers should review the retail pricing in national publications, such as NADA, Auto Trader and Blue Book, and market conditions to arrive at a sale price for each vehicle. This price should be non-negotiable and how it will be derived clearly stated in any literature to drivers. You will avoid confusion and potential haggling by stating clearly your sales policy and the firm price. If your vehicles are priced considerably lower than the full market value, you may wish to also advertise the market price along with your sale price to show the value to the employee. By selling vehicles to employees, fleet managers expect to obtain higher sale proceeds than contracting with third party marketing entities or auction companies. The primary reasoning behind this is that these outside sources must subtract their expenses and fees from the sale proceeds. Selling vehicles to employees removes this profit margin and puts more money back into the organization. When setting prices for employee sales, you should always consider the fair market value of the vehicle. Do not consider what you would have received from having someone else marketing your vehicles or your remaining book value as what you should charge your employees. Decide if providing financing though a third party financial institution makes sense for your employees. Often, a financing option costs you nothing while increasing the odds of selling the vehicle quickly. Financing options may also reduce the time out-of-service, generating faster payments to the company. For many fleets that lease their vehicles through a fleet management company, the company can be the sales entity and deal directly with the drivers. The company sets the sales price based on their resale experience and the driver can either buy the vehicle or pass on the sale. This method of selling the vehicle keeps the fleet manager out of the loop, eliminating any accusations of impropriety. Fleet management companies will also offer financing to the employee through their own financing department, giving the employee one-stop shopping for the car buying experience. d) Marketing NAFA s FADG Disposal F-13

14 2. Auctions Successfully marketing used vehicles to your company employees will reduce the time between when the vehicle goes out of service and when you receive the proceeds from the vehicle sale. Effective marketing is also essential if you are going to receive the highest dollar return. Basic modules within a marketing program include: Comprehensive vehicle descriptions Dates for vehicle viewing and sale Information on financing (if available) Warranties (if offered) Transportation costs A no haggle price Arrangements for the sale There are different ways to market your used vehicles to employees such as printed letters or flyers, notices to current operators announcing the replacement vehicle, and Internet sites. Unless vehicles are mostly sold to current drivers, the best approach may be to establish an Internet presence where all the facts on each vehicle sale can be supplied (including pictures), with automated responses from potential buyers. Additionally, some of the major lease companies have their own Internet sites that can market your vehicles to your employees at the end of leases. a) Running Your Own Auction If you have the resources and talent, you might wish to conduct in-house auctions to dispose of your used vehicles and equipment. In doing so, you save the expense of contracting out this function and have better control over marketing and general conduct of the sale. However, you assume all the legal and liability issues surrounding the process and the workload. For these reasons, most fleet managers limit in-house auctions to small units of property or very specialized equipment that may be expensive, have a limited customer base, or are difficult to relocate. You should discuss disposal options with management and look at the costs and liabilities of the options carefully when choosing your vehicle disposal process. (1) On-Site Conducting vehicle auctions at your site has several advantages such as saving time relocating vehicles, saving storage costs at another location, and reducing the time the vehicle is out of service awaiting sale. This assumes, of course, that you have the property available to house the vehicles and facilities at which to conduct the auction. However, as stated previously, you and your company will assume certain liability considerations and increased workload. F-14 NAFA s FADG Disposal

15 Fleet Acquisition and Disposal Guide Disposal (2) Virtual Just as most manufacturers now offer new vehicle ordering through the Internet, many fleet managers are now turning to the Internet to dispose of their used vehicle fleet. Whether supporting outside auction entities or inhouse sales and auctions, the Internet is proving to be a valuable tool for marketing and sales. Vehicle information and pictures can easily be posted to websites and updated at a minute s notice to provide potential buyers a detailed view of what is available, including all terms and conditions of the sale. Internet websites can be programmed and maintained either through your in-house computer support, through services provided by contractors, or by yourself if you are Internet savvy. As in most practices, you must weigh the costs of contracting out all or partial vehicle sale initiatives with the in-house costs, including personnel resources. b) Outsourcing Many fleets contract with auction companies to publicize their vehicles, organize auction details, and conduct the actual auction. Advantages are that these companies draw larger audiences, which helps ensure a better return on investment, and frees large amounts of time for the fleet management department. Large nationwide auction companies may work best for a fleet operating over a large geographic area while a small regional company may best serve an organization of similar scope. A potential pitfall to commercial auctions is placing specialized or expensive pieces of equipment in a general auction where buyers may not bid maximum prices. By reserving minimum bids or offering these pieces as separate items to a wider customer base may alleviate these problems. There are also auction companies that specialize in certain types of equipment (i.e., construction, emergency/rescue, etc.), so be sure to research in your area to get the best possible auction company according to the type of equipment you are selling. There are two types of auction companies to consider: public auctions and dealer auctions. Public auctions let the general public bid on vehicles for sale while dealer auctions are only open to new and used car dealerships and brokers. Each type of auction has its advantages and disadvantages. An advantage in using a public auction is that units will be seen by a large number of people, potentially increasing the chance the vehicle will sell at a minimum price. However, a disadvantage is that many of the public buyers may not be pre-qualified to pay for the unit. If your unit sells, but the buyer does not have the funds to pay for it, you will have to resell the unit at a later auction, delaying your receipt of funds. NAFA s FADG Disposal F-15

16 An advantage to using a dealer-only auction is that buyers are pre-qualified and therefore able to pay for the unit purchased. However, dealer-only auctions usually contain vehicles that are in good to excellent condition, so if your vehicle is not in the best shape, it may be difficult to sell. First and foremost, the number one issue that should be addressed when considering the use of contract auction services is an evaluation of the units to be sold and an agreement that details the best way to sell them. After that decision is made, you should investigate available auctioneers to see which have experience with the types of equipment that are being sold and contact any references. Selection of an appropriate auction site and proper marketing should be initiated early. Sale units should be grouped and prepared (if appropriate) for sale. Finally, the auctioneer should have the ability to pre-qualify buyers in advance and have superior expertise in conducting the actual sale. (1) Negotiating Rates Many firms prefer to find an auction house they are familiar with and negotiate rates on their own. Some firms ask for request for quotes (or RFQ) to find the best rates in a given area or with certain national firms. Others find that request for proposals (or RFP) is the best way to find an auction with rates that are acceptable. Rates may be a flat fee per vehicle, or may be a percentage of the sale of each vehicle, with discounts for large sale lots. (2) Measuring performance The best way to measure the performance of an auctioneer is to compare the proceeds with the fair market value of the vehicle. After all, this is what your goal is: maximizing sale proceeds and limiting depreciation. A secondary consideration is how well the company collaborated with you to prepare your units for sale and how well they conducted the sale. An important point to remember is that buyers who attended your auction tend to hold you responsible for everything connected to the sale, including the ultimate prices paid, vehicle condition, location, auction facilities, and the manners of the people involved. Even though price is the primary measure, you should also look at your experience and relationship with the company, the overall conduct of the auction day, and any feedback you may receive from buyers. 3. Trade-Ins Some fleet managers may trade in used vehicles to offset the costs of new vehicles. This method of vehicle disposal is not used extensively and is usually only available at new vehicle dealerships. Trade-ins are not usually an option for those fleets that obtain their vehicles directly from vehicle manufacturers or through leasing companies. However, many local dealerships of larger trucks and construction equipment may offer the trade-in option if they have a group of F-16 NAFA s FADG Disposal

17 Fleet Acquisition and Disposal Guide Disposal potential buyers. This would then offset the cost of a new acquisition and free up more cash for capital investments. Before exercising this disposal option, fleet managers should thoroughly analyze the potential proceeds from trade-ins and the potential of other disposal methods to ensure that the method resulting in the greatest proceeds is used. 4. Direct Sales You may wish to market your used vehicles and equipment directly to individuals, groups, or organizations. The way to obtain the highest resale value when selling your vehicles directly to consumers is to develop a market (or list) of buyers ahead of time. This can be accomplished by keeping lists of repeat customers, using a network of vendors from a remarketing company, or taking advantage of association networks, such as the National Association of Fleet Resale Dealers. You may want to establish different lists for your sedan fleet and another for your heavy trucks or special purpose vehicles to target buyers interested in specific types of vehicles. Having established customers for your vehicles makes selling easier, faster, and usually more profitable. As a reminder, in Canada, if you sell directly to an individual or group, you need to have a retail dealer s license to complete a retail transaction. 5. Third Party/Fleet Resale Dealers/Wholesalers You may elect to use a third party to dispose of your used vehicles. This is not the same as an auction company. These companies collect vehicles from many sources and sell them using a list of pre-established buyers. In this scenario, you contract with such a company to pick up the vehicle, they arrange for all title/ownership and legal paperwork, and they sell the vehicle. This usually accomplishes the sale quickly with minimal interaction on your part. This method of sale is extremely attractive if you have limited personnel resources. If you lease your vehicles, your leasing company will usually dispose of them at the end of the lease. Whether or not the sale proceeds affect your financial position will be dependent upon the terms of your lease, i.e., closed leases versus open-ended leases. 6. Internet Sales Internet sales may be useful in conjunction with many of the disposal methods already discussed in this chapter. Whether you are selling your vehicles inhouse, using a third party sales entity, or using an auction company, the Internet is a fast-growing tool for marketing and direct sales. The Internet can also be used by different sale entities at the same time, such as an auction company actually doing the disposal actions and the fleet manager providing vehicle descriptions, pictures, condition reports or maintenance histories on line for buyers to review. Indeed, the Internet is fast becoming the place to sell almost NAFA s FADG Disposal F-17

18 everything, so why not vehicles! Fleet Managers need to stay abreast of Internet technology and use it to the fullest extent possible. 7. Company Retail Sales Retail sales from your company location require a great amount of time and expertise on your part. You must be aware of market trends and be an excellent negotiator to obtain maximum sale proceeds for your fleet. On a downside, usually your best units will sell well before your less desirable units. This leaves you with the problem of marketing these lower quality vehicles and probably obtaining lower proceeds on them than if you had auctioned off the entire compliment of vehicles at one time. Only the most experienced fleet managers with ample space and personnel resources should consider this approach. However, if you have all these traits, it is possible to obtain superior proceeds. Another approach to company retail sales is to market a set lot of vehicles and accept sealed bids from buyers. The upside of this approach is that all units in the lot will receive equal proceeds. The downside is that you may receive less than optimal bids and specific sale proceeds cannot be attributed to a particular vehicle. Again, as a reminder for Canadian fleets, if you sell directly to an individual or group, you need to have a retail dealer s license to complete a retail transaction. 8. Upstream Selling Upstream selling is when a fleet manager can remarket vehicles earlier in the wholesale process before going to a live auction. Upstream selling involves preselling vehicles at a grounded dealer, or in some cases, selling vehicles while they are still in service. The typical upstream selling scenario has two steps: a. The vehicle is first offered to the grounded dealer. If the dealer declines to purchase the vehicle, it is placed on a web site. b. If the vehicle does not sell on the web site, it is sent to auction. Advantages of upstream selling include reduced days to sale, shortened holding costs, increased gross earnings, product exposure to the broadest dealer audience, and elimination of reconditioning costs. One disadvantage, at least from the dealer perspective, include the unknown variable of the vehicle and the possibility of greater arbitration hassles. From a fleet manager s viewpoint, some disadvantages may be the inability to ship vehicles in quantity, higher administration costs when shipping vehicles from different dealerships versus having a marshalling yard, and the possibility of having inventory cherry-picked. Upstream selling can be viewed by fleet managers as actually combining different marketing opportunities into channels of a cascading sales stream. F-18 NAFA s FADG Disposal

19 Fleet Acquisition and Disposal Guide Disposal When a vehicle goes into the stream, the vehicle goes into a sequence of resale channels. At each channel, the vehicle has the potential of being sold. If it is not sold, it proceeds downstream to the next channel. This continues until the unit is sold. The earlier the vehicle sells upstream, the more the costs of selling a unit are minimized and the greater the percentage of resale value is returned. SECTION 4: Salvage or Scrap Fleet Managers should dispose of accident damaged vehicles and vehicles with severe structural defects differently than the rest of their fleet. The primary question you should be asking is, Do I want this vehicle to end up on the nation s highways after I sell it? Salvage yards or individuals with the intent of repairing it may buy salvaged vehicles. In either case, vehicles sold as salvage have the possibility of being operated again. Your company may be liable after such a vehicle is repaired if there is an accident resulting from the vehicle s condition. You should sell the vehicle as scrap if the vehicle is badly damaged and your intent is that the vehicle will never be operated again. If you are selling vehicles as scrap, be sure to clearly mark the sale documents and/or title/ownership as such and that it should not be repaired. There are some entities that believe in not wasting an asset, no matter what its condition. They keep vehicles and take door panels, truck beds, or dashboards out of the scrap vehicle when needed. While this may be a cost saving measure to extend the life of vehicles in the fleet, this can only be used if the company has enough space to house the scrap vehicle and the manpower and tracking system available to make this work. SECTION 5: Summary Establishing a good vehicle replacement policy can help a fleet manager acquire the best vehicle to get the job done, while a good vehicle remarketing policy can maximize the dollars being returned to a company when the vehicle is sold. Both policies are flexible, changing as needed to allow the fleet manager the broadest opportunities possible in replacing and selling vehicles. NAFA s FADG Disposal F-19