Dealer mark-ups on trade-ins?

Tex Mexico

TrevinDevon said:

@Tex Mexico Although if they've taken your £2k guitar for £750 and sold you a full-price £4k brand-new one, they've presumably made the same profit if they sell yours for £750 plus any overheads as they would have done if you hadn't traded it in. If they sell it for more than that, then they've made a bit more.

That's true, but the key here is it takes longer to get thst £750 (or more) if you take that value in stock. That's not good for cashflow, which is the beating heart of any business, retail or otherwise. As a business you want to get your stock out of the door at the expected margin, not to take a chunk of that margin in material you then have to resell.

I'm a purchasing manager, this is a calculation I have to make every day.

FunkyGibbon

You’re right that consignment ant trade in are two very different trading models. On reflection:

I guess my point is that ‘you pays your money and takes your choice’. If one opts for a trade in and accept the offered value one forfeits the right to object to whatever mark up the shop is able to make because one accepted their offer with ones eyes wide open.

It’s different if one have good reason to believe one has been defrauded e.g. one was offered £3.50 for your mint 1934 Martin D18 because it was ‘a 1960’s ‘law suit’ knock off.’

in order of value received, like used cars it’s:
private sale - highest yield
concession sale - predictable yield 
trade in - lowest yield

If one accepts trade in the shop is entitled to make the best out of the deal. Presumably, in taking the trade in one is considering that to be the best deal. 

shufflebeat

Andy79 said:

I talked about a trade with PMT, was offered around half market value. The guy advised me to sell privately 

That tallies with my experience, seems to be a formula for them.

pjf

If you look on the North American Guitar site it tells you no VAT is payable on pre-owned instruments. I don’t know how it works or whether that means the shop doesn’t pay VAT either.

Strat_a_tat_tat

pjf said:

If you look on the North American Guitar site it tells you no VAT is payable on pre-owned instruments. I don’t know how it works or whether that means the shop doesn’t pay VAT either.

If you're in the UK, VAT is payable on pre-owned instruments sold by dealers (the amount depends on the method option being used by the dealer). Dealers don't get to pick and choose if they pay VAT on a sale.

Whitecat

I wonder if what they actually mean is “VAT isn’t deductibe” - someone with a VAT number obviously doesn’t pay VAT on a new item, but if they are operating on the so-called “margin scheme” then the VAT must be paid, it cannot be deducted from a sale. 

ToneControl

markj said:

I traded in a Gibson es335 in part ex for my Martin HD28 in January at Frailers in Runcorn, I was given £1800 for it. Frank at at Frailers sold it for £2000 around a month later.

bear in mind that Frank's overheads are as close to zero as is possible

guitars4you

Whitecat said:

I wonder if what they actually mean is “VAT isn’t deductibe” - someone with a VAT number obviously doesn’t pay VAT on a new item, but if they are operating on the so-called “margin scheme” then the VAT must be paid, it cannot be deducted from a sale. 

We all/should use the margin scheme on used gear - Effectively the dealer pays the vat and not the customer - No vat is reclaimable as part of the margin scheme - If I make £200 profit on a used guitar HMRC acquire £33.33 and the rest is mine - Even if you are a vat registered business you can't claim this £33.33 back - Ditto for overseas sales outside the EU as well - Only applicable to the margin scheme

guitars4you

I can't answer the question based on what is the mark up as it is not a fixed format for me

If I buy a guitar from a customer, then I will make more profit than I would if it is  a part exchange - But how much I make will depend on a few factors
a) - How much I want your guitar
b) how quick I can potentially sell it
c) A more expensive guitar then instead of making say XYZ profit, then I might accept a fixed amount of money - ie 10% on a £100 guitar is not worth bothering with - But 10% on a 10K guitar is a different proposition, so a 1K profit might be healthy at times

If the guitar is acquired via a part exchange - Then again what you are trading in + how quick I can sell it will come into play - Also how much money is coming in, along side the trade in, to enhance my cash flow - How much profit I'm making on the guitar I'm selling you - As an example ;-  If you are buying a £3500 new C/Shop Fender and trading in a guitar that is worth say £500 for me to sell - On such a transaction I might well allow  £400/450, as you will be paying me an additional £3000, so if I can get the £500 back on your trade in, it might be acceptable to have a small profit on the trade in, but quick cash flow

I think if a store tells you it is worth 50% of the potential selling value on a trade in, it's because it is a company default policy that is easy to teach/administer, where often the owner is not involved with the day to day activities of that business - Otherwise you try and teach your staff about the ability to negotiate a trade in, coupled with the skill/knowledge to know what all the potential trade ins are worth - I've done this job for over 40 years and only have so much knowledge - If you wanted to trade in a 7 string custom built guitars with fan frets and a host of weird options, then I would not know its value - So how do you expect a new kid in a shop on a low wage to know - I think this is partly the reason stores like Dawson's no longer accepted trade ins - Effectively offering 50% of its resale value as a company policy, is either an insult, or a 'go forth and multiply approach' and effectively means we don't want the trade in, or don't have the ability to educate our work force to concoct a deal that works for both parties

icu81b4

So What's the VAT position on commission sales? If I sell a guitar privately, I don't have to pay VAT, but if I ask a local guitar shop to have 'my' guitar in his shop window, and  my guitar sells, and I then give him 10% - Does that 10% qualify for VAT? - just curious. 

ICBM

icu81b4 said:

So What's the VAT position on commission sales? If I sell a guitar privately, I don't have to pay VAT, but if I ask a local guitar shop to have 'my' guitar in his shop window, and  my guitar sells, and I then give him 10% - Does that 10% qualify for VAT? - just curious.

Yes it does - on the commission, not the whole value. So the 10% then becomes 8%.

That's why very few shops will offer a commission rate anything like as low as 10% now, at least if they want to make commission sales a profitable part of their business rather than just a way of getting some interesting stock with no outlay.

guitars4you

ICBM said:

icu81b4 said:

So What's the VAT position on commission sales? If I sell a guitar privately, I don't have to pay VAT, but if I ask a local guitar shop to have 'my' guitar in his shop window, and  my guitar sells, and I then give him 10% - Does that 10% qualify for VAT? - just curious.

Yes it does - on the commission, not the whole value. So the 10% then becomes 8%.

That's why very few shops will offer a commission rate anything like as low as 10% now, at least if they want to make commission sales a profitable part of their business rather than just a way of getting some interesting stock with no outlay.

The same vat 'margin scheme applies to the dealer - I work on 20% as we also have to pay card fees on the whole amount - So a £1000 sale and I'd be pay £10/15 fees to the bank for processing a £1000 card transaction

But on a £1000 sale, I'd pay you £800 and no vat comes into play for you - But from my £200 gross profit then HMRC want £33.34

So my £200 gross profit becomes £200 - £33.34 - £15 -So effectively 25% of my profit is a cost of business 

I have heard of other businesses (often in another trade) and/or auction houses were they will charge you 20% + vat on the profit, equates to 24% - So £1000 sale, less 24% and a payout to you of £760 and not £800 - So effectively they charge you the margin scheme vat on the deal and they still retain the 20% profit 

Hope that makes sense

icu81b4

@guitars4you Thanks for the breakdown Mark,  buying through online auction houses can turn out to be expensive, even after you have paid the commissions, then the courier that you sometimes  have to use adds an additional cost that you hadn't accounted for can bring a sour taste to the excitement you had on winning the bids in the first place.