The couple had such high hopes when they opened their consignment shop. They got their inventory for free, they reasoned and since the real estate turnover in their upscale neighborhood was brisk, they should have a steady supply of both consignors and customers.
The neighborhood, too, welcomed the new business enthusiastically. Within a few months the couple had more than 800 consignors of antiques, collectibles, furniture and home decor. Sales were steady, but near the end of their second year, the shop went bankrupt and the consignors lost all of their property.
The shop owners had signed a triple-net lease, which required them to pay a pro-rata share of the taxes, maintenance and insurance for the shopping center they were in. When the center decided to re-pave the parking lot, the expense was passed on to the lessees, and the consignment shop couldn’t keep up with the lease payments. Behind in the rent, the landlord locked out the shop owners, and they declared bankruptcy. The shop’s consignments became the property of the landlord, in partial payment for back rent.
It’s a common tale, repeated all over the country. Consignment seems like such a straightforward business: Rent a storefront, advertise, take some consignments, sell them and give a percentage to the consignors.
What could be easier?
Generally, it’s what the consignment shop owner doesn’t know that gets them into trouble. They don’t know about sophisticated retail leases, inventory turnover and tracking, accounting, merchandising or the legal implications of consignment contracts.
Of course, I suspect that for every consignment shop that “bites the dust” there are a few more that are perfectly reliable and have been in business for years. On the whole, 53 percent of new retail establishments fail within the first five years. Whenever I consign merchandise, I prefer businesses that have been around for at least that long. By itself, length of time in business isn’t a reliable indicator of how secure my consignments are. I’d have no problem consigning to a shop that’s been open for a month if the owner had good references. Most consignment shop owners are reputable, honest people. But, like every profession, there are just enough “bad apples” out there to cause me to be cautious. So, here are a few elements that I insist are in place before I hand over my merchandise.
First, I always check online reviews (Yelp, Google, Yahoo Local and Citysearch) for a shop, and the search to see if there are any complaints registered against the business or its owners (Google complaints > business name > city & state). Reviews tend to stay around forever, and are rarely retracted if addressed by the business owner. If there are complaints, I’ll ask the owner about the situation just to see if he/she squirms and back-pedals or offers a reasonable explanation. I let my “gut feeling” make the final decision on this score.
I’ll visit the store as a customer to see how they treat customers, how the merchandise is displayed and how much traffic the store has. If I’m happy with what I see, I’ll ask to see their consignment contract.
The first thing I look for in a consignment contract is plain (but clear) English. Legalese doesn’t work for me; none of this “party of the first part and party of the second part” stuff. The contract should include a detailed description of my items, because there may be similar items in the shop. I always attach photos if my item doesn’t have a serial number or some other unmistakable identifier. The shop has to be responsible for damage or loss at the full wholesale value quoted on the contract. Once they have control of my item, they are responsible for it or I don’t consign there.
How much, when and how I get paid is important. I prefer consignment shops that keep customer funds in an escrow account, but few of them do. It makes me nervous when consignees put my money into their general operating fund. Co-mingling funds is the No. 1 reason that consignment shops get into trouble. Too often, the consignors are paid only after all the other bills are paid.
Most consignment shops settle accounts on a regular schedule – monthly or weekly. Although consignees are reluctant to agree to this, I like to add a “due on sale” paragraph. If I go into a shop where I have consigned merchandise and my item isn’t there, then I want them to write me a check on the spot (or at least provide me a copy of the dated sales receipt so I know they haven’t “misplaced” my item). The contract should stipulate what happens at the end of the consignment period if my item doesn’t sell.
Most importantly, I want the contract to stipulate that I retain title to my property if the business should go bankrupt. A consignment contract creates a creditor/debtor relationship. As the consignor, I’m the creditor, and the consignee (the shop) is the debtor; they agree to pay me the stipulated money or return my item. In a bankruptcy, the debt that’s owed to me gets rolled right in with all the other debts of the shop and my property is seized by the court for sale to pay the creditors. In the hierarchy of debts, unsecured creditors (like consignors) are the last to be paid – if they’re paid at all.
In some states, it makes no difference what the contract says; if there’s a bankruptcy and I’m an unsecured creditor, then my money is likely gone. The solution to this problem is to secure the debt by filing a UCC-1 form at the county courthouse. Filing a UCC moves a consignor to the ranks of secured creditors. According to the Uniform Commercial Code (UCC), proof of ownership can also be substantiated by having the shop owner clearly mark that your item is consigned.
Of course, a UCC-1 requires a lawyer and in most cases isn’t worth the expense. If I’m consigning a valuable collectible, then a UCC-1 is certainly worth the expense.
The disposition of consigned personal property in bankruptcy proceedings has become such an issue that 31 states have passed laws to protect consignors from bankruptcy abuse. They are: Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Florida, Georgia, Hawaii, Idaho, Illinois, Iowa, Kentucky, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Montana, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Ohio, Oregon, Pennsylvania, Tennessee, Texas, Washington and Wisconsin. If you don’t live in one of these states, your consigned goods are at risk.
Laws change, and vary from state-to-state. If you are going to consign a lot of merchandise (like an estate) or a valuable collection, discuss your situation with an attorney before you proceed. What I’ve written here is subject to change at any time, but the caution I exercise when consigning isn’t likely to change any time soon.
Is consignment a safe selling alternative? Of course it is. Manufacturers consign billions of dollars’ worth of industrial goods and consumer products every year.
Auctioneers process millions of dollars’ worth of consigned goods as well, and I suspect that the dollar figure for retail consignments is “up there” as well. Just be careful whenever you consign, and remember that the consignor bears more risk than the retailer.
Previously published by Antique Trader Magazine
Originally posted 2014-02-03 09:41:00.