Charity auctions are a popular fundraising method for many, but did you know that a third-party auction company can raise thousands of pounds at a gala while returning only a small percentage of what was raised to the charity? Charity auctioneer Kevin Durham explains how the model works, and sets out the questions to ask before the hammer comes down.
One month ago I had the pleasure of hosting CFG's Annual Dinner and Awards, an evening celebrating the people who keep charities' finances and operations in shape. Many of the guests are those who sign off the numbers after a fundraising gala, which is exactly why I wanted to write this article.
Did you know that a third-party auction company can gross £13,000 at your gala while giving the charity only 10% of what was raised? After 20 years on stage at charity events, I can tell you that figure is not unusual.
‘Scam’ is the word I hear when the invoice lands. The model is legal. But it is also poorly understood, by charities and by the guests doing the bidding. If you'd like to learn more about how the model works, and what to ask before anything is signed, read on...
The mark-up is built into the reserve
The appeal is real: no upfront cost, unsold lots go back, and a small team gets a full catalogue overnight. The cost is in the detail.
The company supplies the lots and sets a reserve on each one. The charity normally receives only what is bid above that reserve. The mark-up inside it is often 50%, and I have seen it reach 300%.
Guests think they are giving to you
A guest bidding from their seat expects the money to go to the cause, and is bewildered to learn how little does. The law expects better. In England and Wales, section 60 of the Charities Act 1992 requires professional fundraisers and commercial participators to tell donors which charity benefits and how much it will receive. Take advice on which category applies; both carry a duty to disclose.
I have rarely seen guests told, unless I say so myself in my welcome speech. One national charity I now work with has seen both sides. One year, an outside silent auction company grossed about £13,000 and the charity received about £1,300.
The following year the room was told where the money was going, and a live pledge was added. The silent auction grossed about £3,500, of which the charity received about £400. The pledge raised £8,300, all of it for the charity.
Two more tactics to watch
Hidden payment fees. Some companies that provide the bidding software add 0.5% to 1.5% to the payment fee in the back-end. It is another slice of your fundraising.
Overstuffed brochures. I have seen one with 120 lots. A handful of strong lots makes guests outbid each other, and the charity’s money is all above the reserve. Volume gets more lots to the reserve, where the supplier’s profit already sits.
You do not need shiny lots
Charities get attached to the idea that a good fundraiser needs glossy bought-in lots. I do not think that is true. Source what you can in-house. Ten lots reach only ten people anyway.
The live pledge reaches everyone, and it is a gift, not a purchase. HMRC guidance says payments for goods are not gifts, so most auction bids cannot carry Gift Aid. A £500 pledge from a UK taxpayer is worth £625. In my experience a well-structured pledge more than covers any shortfall from modest lots.
What it means for the accounts
The Charities Statement of Recommended Practice (SORP) says income raised by a charity or its agents must be reported gross, with any fee a third party deducts shown as a fundraising cost.
Whether a supplier’s reserve is that kind of cost, or money that was never the charity’s, depends on who sold the lot: the charity as principal, or as the supplier’s agent. Settle it with your auditors before the event, and report the net figure to trustees alongside the announced total.
Five questions to ask before you sign
1. What is the reserve on each lot, and what is its cost price? Can you provide evidence of the cost price?
2. What did the charity receive, lot by lot, at your last three events?
3. What fees are added to payments, and who keeps them?
4. How, and when, will guests be told who receives what?
5. Are we selling these lots as principal, or as your agent?
If the answers are slow to arrive, that tells you something too.
To find out more about Kevin's work, visit his website