ACV Auctions: Operating Model

Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

What was the rationale behind starting an online auction, for ACV?

Yes, let's go back to the early days with the co-founders Dan, Joe, and Jack. The initial pilot for ACV was centered around dealer self-inspection into the marketplace. One of our co-founders, who had been working at a local dealership and had been in the car buying business for quite some time, was piloting a tool for dealer self-inspection with consumer trade-ins.

However, the problem encountered in the early days was the accuracy and reliability of dealer inspections. When this information was put into an open marketplace, it was not surprising that car dealerships did not trust each other. The initial concept was that a dealership would provide a great trade-in experience. For instance, if you pulled in with your Citroën and you wanted to buy a Mercedes, they would take your trade. But they wouldn't put that Citroën on their front lot. They would want to get you in that Mercedes.

The question then was, how do they get rid of that inventory? The old process was centered around moving that vehicle to a physical auction, which was geographically dispersed. There were logistic costs involved in this. And once you've moved a vehicle to a physical auction, which might be a few hundred kilometers away, what do you do if it doesn't sell? You've got time and resources tied up into that.

The idea was to move that inventory to a dealership that's generally geographically close. In the United States, due to zoning laws, dealers are very concentrated around each other. You would drive a couple hundred kilometers away to an auction with people from the same market that you just left, buying inventory that has a probable chance of ending back up down the street in the same market you were in.

So why not just bypass the physical auction side of it and move the inventory dealership to dealership within the local geography? That was really the emphasis of how ACV started. It was a B2B transaction for dealers in a local geography.

If you look at how the company was founded in western New York, there were only a few regional auctions. Some of the larger auctions were much more geographically dispersed. Manheim, Pennsylvania, outside of Lancaster, was one of the big geographies. It's quite a distance from where that market was actually playing in terms of moving inventory.

Local dealerships were asking, why can't we just coordinate this intra-market? Why do we need to put money and resources into the pockets of Manheim to move inventory from dealer A to dealer B? Dealerships are tight-knit communities. Everyone knows everyone. Even in the larger industry, there is a lot of intra-team and intra-dealership knowledge of the top players and the owners. It's a pretty small community.

The idea of these dealer self-inspections getting into a marketplace that could be accessed locally by other dealers was really the initial driver for ACV. However, the pivot came because of the reliability of dealer self-inspections and the inconsistencies that were being seen from dealership A to dealership B, in terms of how they were bringing and delivering inventory into this marketplace.

That's when ACV made a hard pivot to say if this concept will be successful, we need to position ourselves as almost the Switzerland or the independent neutral party that's going to validate and put a barrier between buyer and seller on neutral ground. We would vouch for the condition of the inventory in a neutral manner to give an accurate representation prior to the marketplace listing.

I'll talk a little bit later about how there are carryovers of that initial concept into the ACV marketplace. But the shift then became ACV hiring its own independent inspectors to perform those inspections at a dealership. Even to this day, most of the workforce numerically is centered on a distributed nationwide team of independent inspectors.

You mentioned something about dealers being located close to each other. Why is this the case?

It's a trend, particularly in the Americas, and it's largely due to zoning laws in certain municipalities. We encountered this at CarMax, where I was responsible for opening new stores. In the United States, municipalities tend to zone dealerships in a specific way, often in certain areas within a geography. They don't usually place a car dealership behind a residential neighborhood. Instead, they tend to locate it in retail-centric areas. This is partly due to the operating hours.

Dealerships have a lot of transport activity during off-hours. Cars are shipped from manufacturers and auctions, and trucks unload late at night. Dealerships are often well-lit due to security concerns related to maintaining inventory. They often have high fences, creating a bright and secure environment. This can cause light and noise pollution, so municipalities tend to zone dealers in specific areas. As a result, you often see what's called "dealership row" in many US towns, where you'll find a Nissan dealer next to a Chevy dealer next to a Toyota dealer.

This is partly due to zoning, but also due to the restaurant model. In the United States, localized competition creates a hub environment, attracting consumers to one area. There are several different factors at play, but this is a common trend in the states.

I'm not sure if this is relevant, but if you segment the car markets into independent dealers, franchise dealers, car rental companies, and financial/insurance companies, who was the initial ACV offering aimed at?

The initial offering was primarily focused on what I would call a franchise dealer, someone holding the OEM rights. However, it quickly pivoted to independent dealers when we started doing our own inspections. To this day, independent dealers remain the primary source of most transactions on the platform, although we have significantly grown the franchise dealer segment.

Why was the initial offering catered to franchise dealers, and how did hiring their own inspectors allow ACV to pivot more towards independent dealers?

The initial focus on franchise dealers was due to their operational staff being more suited for conducting their own inspections. Most dealerships have a used car manager, a well-paid position responsible for bringing used car inventory into the dealership and managing used car transactions.

Trade-ins and used cars represent a core profitability stream for most franchise dealers, as they already have staff familiar with the trade-in and buying process. The original concept was to have them conduct the inspections, given that this task aligns closely with their daily work of buying trades from consumers in their own drive lanes. The idea was to have them inspect the inventory they wanted to resell and put it into our marketplace.

However, due to some dishonesty and inconsistency in the listings, we decided that they should not self-inspect the cars. Instead, we needed to step in as a neutral party to ensure the accuracy of the condition reports for all these vehicles.

This shift in approach became beneficial for independent dealers, who usually lack the staff and overhead to conduct inspections. These are typically smaller operations. So, when we offered to drive on-site and inspect for free with no upfront commitment, it became very attractive to the independent market as it allowed them to avoid additional overhead costs associated with transacting on the platform.

I've been speaking with dealers recently, and a recurring problem I hear with online auctions is that you just can't touch and feel the car. And sometimes, for example, something like the smell because it was a smoker who owned the car, looking at it behind the screen, there is no way for you to know if this was the case. How did you guys at ACV go about closing this gap, the information gap?

I made my mark in the market with ACV, addressing this specific problem. When I started in the special projects team, our main goal was to bridge the gap in the market space. Having been on the other side of the equation at CarMax and Carvana, and dealing with inventory from the wholesale side, I understood the gaps that were present in the physical auction. We aimed to focus on the customer experience.

Our first step was to build a unique product that would give us a competitive edge. We introduced the audio motor profile (AMP), which may sound a bit odd, but in a digital marketplace, there were other listing sites. However, none of them had proof that the engine was operational. We decided to include a high-quality engine recording in the listing, done in a consistent manner that would engage the marketplace.

In a physical auction, you can touch, smell, and listen to the car. We wanted to replicate that experience in a digital marketplace. By introducing an audio experience, we added an extra sensory depth to the digital screen. It was not just visual anymore, but auditory as well. This was a novel idea, and we had a strategy to not only capture high-quality audio but also to use diagnostics in the long run to detect certain conditions and increase our accuracy.

The second thing we did was introduce virtual lift, which involved undercarriage imaging. This was not standard within the industry, and certainly not a practice that was unpaid for. We decided to offer this service on every single car for free. We developed proprietary technology that could be mounted on a motorcycle for portability, allowing us to capture the undercarriage image of every vehicle.

We faced some resistance in the marketplace, but within 18 months, we were able to offer high-quality audio and undercarriage imaging for every listing free of charge. This was information that was not available on any other marketplace at the time, and it was a view that you wouldn't even get at a physical auction. Normally, the only way to get that view was after you had bought the vehicle and paid for a post-sale inspection. We disrupted the market by offering this view for free before the purchase.

We also introduced a buyer insurance program called Go Green. This program allowed buyers to unwind the deal for almost no cost if they were dissatisfied with the purchase. All these innovations were introduced within 18 months, starting around 2018, and quickly set us apart from the competition.

Subsequently, we introduced other features such as OBD2 codes and improved our imaging. We did not limit the photo experience like many other sites did. At a physical auction, even for a digital listing, you may only see four to 10 photos of a vehicle. We had listings that might have 80 to 90 photos of a vehicle. Our cap was around 99 photos, which was far more than any other site at the time was offering.

If I'm an independent dealer and I want to list a vehicle I have on my lot, could you guide me through the process of doing it on ACV?

There are two ways to initiate your marketplace listing. If you are what I would call a volumetric independent, meaning we do a significant amount of business with you, we may have a standing appointment where we send an inspector to your lot on a specific day of your choosing to list your inventory.

We also have an on-demand feature. For instance, if you acquire a vehicle on a Wednesday and we normally come on Tuesday, you don't have to wait six days for the inspection. You can request a direct inspection which will be scheduled at the next available opportunity in your market. You may not get your dedicated inspector, as we usually try to assign specific accounts to specific inspectors, but you'll get the next available inspector in your area to come to your location and conduct the inspection immediately.

The dealership initiates the process by saying, "I have inventory". There is no fee to initiate the inspection. However, we do need access to the vehicle and the keys, so there has to be a coordinated handoff when we arrive on site. We can also do this after hours using dropboxes and lockboxes with our dealer partners. The inspection report takes about 30 to 45 minutes per vehicle. As an independent dealer, you are integrated into the ACV portal. You can request the inspection report and review it either through the app or the website.

After the inspection, the report is shared with the independent or franchise dealer. At this point, the dealer decides what to do with the information. You can review the report and do nothing, or you can initiate putting the vehicle into the marketplace.

When I want to become a user of ACV, do I create an account on the platform? How do I link my dealer management system (DMS) to the ACV system?

That's a good question. Your DMS doesn't need to be linked. The sign-up process is quite liberal within the wholesale environment. If you register as a dealer, we provide you with 30 days of access to the platform before you have to produce any documentation. This gives you a substantial window to transact on the platform while we validate your dealer status. Every state has a licensing process for certified dealers. We ask for your operating license, tax ID, and dealership ID number. You get a 30-day grace period for us to validate these documents. During this time, you're registered on our portal. You can access our online platform via an app or a website, and your login will bring you directly to our online marketplace.

There are elements of the marketplace that you may not be able to see until we validate your documents, but you would have access to the main marketplace or the general open marketplace. You also have the ability to buy and sell cars. The integrations with your DMS can come at a later point. The bigger concern is the Automated Clearing House (ACH) and how payments will be handled. We need to ensure that we have a connection to a floor plan, either ACV's floor plan that we offer, an independent floor plan, or some means of financial verification for you to conduct the transaction. This is more central to the initial conversation. As we validate dealer documents, we want to ensure that you can transact. These aren't small items. If you buy five or six cars a week, you can quickly accumulate a substantial tab. We want to ensure you're good for it.

For the first 30 days, my documents aren't validated, but I can still buy and sell cars. What happens if you discover I'm not a dealer on day 25?

Fraud does occur. It was a significant problem for us. The idea of being customer-centric and encouraging easy sign-ups does expose us to organizational risk. We've reduced the limits and implemented some controls over time. Currently, we limit transaction volume within the first 30 days. There's now a cap on how much in terms of monetary value or the number of transactions we allow you to perform within that sign-up period to help mitigate the risk. But fraud does happen. It is something that has been exploited in the past and will probably continue to be in the future.

To register as a dealer on ACV, is there a fixed membership fee or a one-time fee?

No, in the current model, there is no upfront commitment cost. All of the revenue is generated through successful transactions in the marketplace. Sign-up doesn't involve a financial commitment, and inspections don't involve a financial commitment either.

Neither sign-ups nor inspections involve a financial commitment. I sign up, put my first car to be inspected. You send someone to my dealership for free. They inspect the cars for 30 minutes, create a report, and then I decide what to do with it. Either list the vehicle on the platform or do nothing.

Indeed, when you receive that report, it's essentially what we internally refer to as a saved auction. At this point, it hasn't been launched to the marketplace. There may be a conversation between the inspector and the lister about the floor price of the vehicle, depending on their relationship.

Essentially, you've seen a condition report, which is simply a description of the vehicle in its current state. However, we've not assigned any pricing guidance to the vehicle. The question then becomes, at what price would you like to sell it? This can be a coordinated decision between the inspector and the dealer, or the dealer can independently assign a floor price to the car.

They can say, 'This is the minimum price I'm willing to accept for it. This is the price I want to launch it at.' There are a few different auction structures to choose from, including private and open marketplaces. So, the dealer has to make some decisions about their strategy. Do they want to launch the vehicle immediately after it's inspected? Or would they prefer to wait for a different time of day, based on when they think buyers will be most active?

There's a bit of coordination that needs to happen on the dealer's part at this stage. But essentially, once they've assigned a floor price, they can launch the auction. This could happen within three minutes of the inspection being completed. They could put it live in the marketplace, or they could save that auction for later. It could be 24 hours before they decide to launch the vehicle. They might say, 'No, I want to wait and time this for tomorrow morning or tonight,' depending on their strategy.

On what basis is this floor price determined?

It's essentially the bare minimum you're willing to accept a bid for that vehicle. For instance, if you have a Mercedes and you're saying, 'I won't take less than $20,000 for it,' any bid less than $20,000 would not result in a successful sale for that car.

You mentioned that sometimes the inspector provides guidance on the car's worth. Where do they get this information from?

Indeed, ACV utilizes its own proprietary pricing algorithms. We provide dealers with access to what we call the ACV market report, available both in-app and on our website. Dealers can search for similar inventory based on geography, mileage, age, and trim features of the asset, and compare it to other similar vehicles. We provide a range of successful transaction prices within a historical period. Dealers can look back a year, 30 days, or even five days, and adjust these parameters as needed.

Our Vehicle Condition Inspectors (VCIs) also have access to these market reports and can provide guidance and engage in pricing discussions. Dealers can choose to partner with the VCIs, seeking insights on vehicle performance and condition report elements, or they can choose their own path. They can decide not to use the market report and set any price they want, even ignoring all historical precedents.

The system doesn't prevent them from doing so. However, as a business partner, we engage in the pricing discussion because we only get paid if the vehicle sells. Our goal is to facilitate transactions in the marketplace. If a dealer is listing with us, they're aiming to sell the asset as quickly as possible. They don't want to put a floor plan on it, they want to clear their lot. The nature of our engagement depends on the relationship we have with that particular account.

On average, do cars on ACV sell at higher or lower prices than at physical auctions?

That's a complex question without a straightforward answer. Pricing in an online marketplace like ours tends to differ from physical auctions for several reasons. Firstly, our fee structure is significantly lower than that of a physical auction, which impacts pricing for both buyers and sellers by cutting out the middleman and allowing for more margin.

Another factor to consider is that when we list a vehicle, it's available nationwide, not limited to a local geography. For instance, a four-wheel drive vehicle in Florida might command a premium in Denver during winter. In a digital auction, I can target my launch strategy towards the Denver market, which wouldn't be possible in a physical auction.

If I were to sell the same vehicle in Florida, the buyer might reduce their offer to account for the cost of transporting it to Denver. Plus, there's likely less demand for a four-wheel drive car in Florida at this time of year compared to Denver. Therefore, the pricing strategy in a digital marketplace is quite different. That's why we provide the market report, to offer real-time transactional data on what's happening on our platform. It's not necessarily comparable to the pricing strategy one might see from Black Book or KBB in a physical auction's wholesale environment.

As you mentioned, the fees are significantly lower than at a physical auction. Could you provide a comparison?

Hundreds of dollars. For instance, a physical auction might have a $900 listing sell fee or transactional fee, versus $250 on a digital listing service. This is a significant percentage of the average margin on a wholesale vehicle. Let's set aside the Carvana numbers for a moment as they're somewhat questionable. However, I do trust the CarMax numbers in terms of average wholesale margin and pricing. If you consider the average vehicle margins to be around $3,000 to $4,000 a reduction in sell fee from $950 to $250 represents a substantial margin savings with a digital strategy.

What enables you to charge only a fraction of the sell fee?

A physical auction environment is resource-intensive. There's considerable overhead at a physical auction, including land costs for the real estate needed to store vehicles, property tax, physical security, and the number of personnel required to run a physical auction. Physical auctions typically occur once a week, and on those sale days, temporary staffing may increase by 400%. This includes hiring drivers and auctioneers for the auction, which are costly resources. Auctioneers usually receive a percentage of total sales for their lane. All these costs are on top of your physical overhead.

Additionally, you're also providing an in-person experience. This can range from live entertainment to food. Various customer-centric expenditures are seen at physical auctions. Each physical auction does it differently, but they all try to incorporate some element of customer appreciation. This could include dinners the night before, post-auction events for top buyers or sellers, door prizes, or incentives for doing the most business in a given week. There's a lot of marketing and overhead expenditure at physical auctions that you don't have in a digital environment.

Let's try to understand the unit economics behind this. On average, you have to send an inspector to a dealer. Could you break down the costs involved in this? For instance, how much would it cost per hour for the inspector plus his transportation? Could you walk me through the unit economics?

You're absolutely right. We pay our inspectors a base hourly rate, which includes drive time. Unit density is a significant factor in inspection deployment within a specific geography. Naturally, a dealership with 27 cars at one location is more desirable than 27 different dealerships scattered across a broader network. We offer a base plus incentive system to our inspection workforce. The "plus" is a sales bonus on all units that transact within a marketplace. For every successful sale, they receive a dollar incentive. This system encourages inspectors to conduct accurate inspections and to facilitate the movement of the vehicle across our platform, working with the dealership on an accurate pricing strategy.

If we inspect a car at a dealership and the floor pricing doesn't align with the current market because it's too high, we could launch that vehicle multiple times in the marketplace, and it may never sell. These are all sunk costs that we will never recoup. The idea was to move away from hiring what I would call veteran automotive inspectors and instead use technology and a systematic approach to inspections. This allows us to employ a less skilled workforce and lower the hourly rate, so we're not paying for experienced automotive technicians to do the inspections. We can train someone on the necessary skills and build enough structure into the inspection process that we can hire inspectors in a market for a lower hourly cost.

For a concrete example, how far would an inspector typically travel to a car dealer on average?

Let's use your Mercedes example. Suppose you're an independent dealer who requested an inspection on a Wednesday. I usually come in on Tuesday, but I'll come to you on Wednesday to do this inspection. There are no extra fees for this service. I'm still getting an hourly rate, but I may leave one dealership to drive across town to your dealership.

We try to limit our service network to a radius of less than 50 miles. However, we do have instances where an inspector may drive several hours for a car. This isn't uncommon because we don't restrict anyone from signing up for our service. For example, in the West, you might have a dealer in rural Montana, with the closest major metro market being Cheyenne, Wyoming. It could be a three-hour round trip to inspect that car. We haven't taken any payment to perform this service. The sunk cost is the inspector's hourly rate to perform the work, and we're giving them a mileage bonus on top of that for their drive time. This is a significant cost investment for ACV, with no guaranteed return.

I have my personal opinions on this, but yes, it can create upside unit economics. One more thing I want to mention. The reason for ACV's growth pattern in terms of expansion, as you can see from our analyst day deck and some of the presentations we've had, is that the Northeast has historically been our best-performing market. This is partly due to geographic population density. Because you can service so many more vehicles in a shorter distance, you have much better unit economics in terms of inspector density in a market and available opportunities in the northeast than you do out West. We've struggled with slower growth rates out West, partly due to geographic challenges.

How much does an average inspector cost ACV per hour?

The pay varies. We have different tiers, but it could range from $25 to $40 an hour. However, it's not fixed as there are incentive bonuses based on their work performance and geographical location. We don't necessarily cap their income. Hence, a high-performing inspector could earn up to $80,000 a year, which is not uncommon. A poorly performing inspector may not be incentivized to stay in the position for long.

How does the inspector get to the dealership? Do you provide them with a car?

They are responsible for their own transportation. They also need to provide their own personal protective equipment. We don't provide them with items such as rain jackets or other accessories.

They need to have their own transportation and cover the fuel cost?

We do offer a mileage supplement.

Could you clarify what you mean by mileage supplement?

If an inspector has to drive from one side of town to the other for a scheduled appointment through our application, that travel distance is logged in our tracking software. We provide all inspectors with mobile devices, so we can monitor their travel distance from point A to point B. This travel cost is part of their reimbursement. However, if they decide to go "prospecting" - for example, driving across town to a dealership they know, asking if there are any cars to inspect, and it's not scheduled through our application - that mileage is not necessarily reimbursed.

All scheduled appointments are guaranteed for mileage reimbursement.

Yes.

What about equipment? Do you provide them with any tools, like a computer or tablet, for the inspection?

We provide about $2,500 worth of equipment per inspector. This includes our proprietary virtual lift, an iPhone, an audio recording device, and an OBD2 device. If they want to buy additional tools like wrenches or lights, that's on them. But our baseline equipment cost is around $2,500. Everything is run through a mobile application. We don't provide laptops or tablets.

On average, how many inspections per hour does an inspector complete?

That's an insightful question. Typically, our top-performing inspectors can conduct around 25 inspections in an eight-hour day at a new car franchise dealer. This number can even reach 30 or more. The speed of the inspection process depends on the quality of the cars. Cars with less wear and tear are faster to inspect. If there's less damage to disclose, the process is much quicker.

Our best dealerships operate with high volume and high density. They line up 20 cars in a row and have all the keys for every car in a lockbox. Our inspectors can then move as fast as they possibly can, inspecting the cars one after the other with no travel time. They park once, inspect 20 cars in one day, and then leave. If the cars are relatively new or clean, they can perform those inspections in ten minutes. It just depends on the amount of damage to be disclosed.

As a result, we see very different hourly performance numbers across our geographies and different metro markets. On average, we expect someone to perform around five inspections per day. This is a reasonable target for a good deployment of a headcount in a geography. When we consider adding resources to a geography or a metro market, if we can't achieve five inspections in an eight-hour period, then the economics just aren't there for us.

Once the report is generated, does the inspector advise the dealer on the reconditioning to be done, or does he just provide them with the report and leave?

Generally, there is no advisement on reconditioning. The advice is usually on the floor price and what we think the bare minimum should be set at for the marketplace, given the condition of the car. In the digital environment, there is no discussion or consultation about reconditioning. The strategy between the inspector and dealer revolves around the floor price, when the vehicle should be launched, and if there are any disputed disclosures on the vehicle.

What percentage of vehicles are inspected and have a report generated, but are never put on the platform to be sold?

The percentage is actually quite low, likely less than 5%. Typically, if a vehicle is inspected, it gets listed. It's rare for a vehicle not to be relisted since there's no cost to do so. The usual argument is that there's nothing to lose. We can set a price, list it, and see what happens. Even when dealers resist, it often works in ACV's favor to at least list the vehicle. It's rare for them to say, "Thanks for the inspection, but I don't want to list it," because there's no upfront cost to list.

In such situations, the dealer usually opts for a high anchor. They might list the vehicle for $2,000 to $3,000 over the wholesale auction price to see if anyone bites. They might think, "Let's list it for a high bid, and if someone really wants this car, we'll see what happens." If they make an extra $3,000 on the car, it more than covers the sale fee. It's a much better deal than taking it to a physical auction. Once an inspection is requested, the closure rate is generally high. However, there are instances where people back out, usually due to their own decisions on reconditioning or, more likely, the title status.

They might have scheduled an inspection thinking they would have the title for the vehicle, which is a disclosure as part of the inspection report. If the title is not in hand, they might delay or even cancel the listing because they don't have the title or are uncomfortable with the title status.

You mentioned that the average inspection time is about 30 minutes. How does this vary between cars at independent dealers versus franchise dealers?

The average inspection lasts around 30 minutes, but it can take over an hour for a car. The variation has less to do with the seller and more to do with the inventory. This tends to skew more towards geographical location.

For instance, cars in the Northeast United States, where we use de-icing agents like road salt, tend to have more corrosion and degrade over time. Cars in the Pacific Northwest can suffer from moss growth, mold, and mildew due to the humid environment. Cars in the coastal Southeast, like the Florida markets, can suffer from salt spray, leading to varying degrees of oxidation and corrosion. These issues are more prevalent in these markets, even on newer cars. Oxidation is a real factor and can increase the overall inspection time. On the other hand, vehicles in Arizona, where there are very few environmental factors for degradation, tend to be inspected quicker because cars there don't rust or deteriorate at the same rate.

What does the standard inspection report include, and how does it differ from what you can get at a physical auction?

Physical auctions typically don't provide a detailed condition report. There's a caveat to that statement, though. The information about a vehicle at a physical auction is generally minimal. It will include the VIN, possibly a few photos, and you might have some disclosures on frame damage, according to NAAA standards.

Major issues would be disclosed, but you might lack detailed information such as trim level, odometer reading, vehicle pricing, and age. At a physical auction, you won't have an OBD2 report on codes in the computer, disclosures around engine lights, tire tread depth, or interior damage disclosures. This is because the expectation at a physical auction is that the buyers will inspect the cars themselves. The cars are usually available for preview before the sale day, and many auctions will offer keys to the buyers and even let them drive the vehicles. However, practices vary from auction to auction. Some are more lenient than others, while at some auctions, the cars are always locked. You can only look around the outside. Because of this physical contact, not much is digitally documented and available pre-sale. It's much less than an ACV inspection.

We could delve into an unlimited amount of details here, but I'm curious about the average time it takes for a transaction to be made after a car gets inspected and put on the system.

The standard ACV auction list time is 20 minutes. The dealer can choose to have longer auction listings. There are a few different formats when you launch the auction, but the default is a 20-minute auction. If you give me a list point right after I perform the inspection, I can have that vehicle in the marketplace in less than three minutes. The minute I finish inspecting it, I'll go back into the portal, put in the floor price of the vehicle, and initiate the launch to the auction. It goes live on the website within three minutes. The auction lasts 20 minutes, so that vehicle can be sold within 20 minutes.

Is the auction always ongoing, or are there certain days and slots?

The auction is perpetual. I can launch one car and then launch the next, or I could bulk launch. For example, I could inspect 20 cars and launch all 20 at the same time, or I could launch them individually or in any combination you want. I could list all my Camrys at five o'clock and list all my SUVs at 10 o'clock.

How is transportation handled once the transaction is completed?

Transportation is always chosen by the buyer. In the buy portal, you've bid on an auction and let's say you had the high bid, it ends in 20 minutes. If nobody contested your bid, you won the auction. At that point, as a buyer, you choose transport. There are two options. It's either, you've elected ACV transport and you get a quote based on where your location is and where the vehicle is, and we'll quote you a transportation right there and check out, or you say, I elect my own transport and you're responsible for coordinating pickup of the vehicle.

Could you compare the transportation costs when someone chooses ACV to transport the car versus when they use a physical auction? In the latter case, cars are less dispersed, allowing for multiple cars to be shipped and the transportation costs to be amortized. How does this compare on a per-car basis with ACV?

Transportation has been a robust business for ACV. We often exceed our estimates in terms of take rate on transportation. We've made efforts to bundle transportation into certain markets and we have a load board that we work with. We collaborate with regular carriers within a market where we can secure decent pricing due to volume.

If you examine our US geographies and the distribution of ACV inspectors, which usually indicates market penetration, you'll notice certain hubs and routes that are popular. For example, moving vehicles from South Florida into Georgia, or from the Carolinas to the Northeast. In a given geography, we may have around 100 different transactions in one day. A significant number of these vehicles take similar routes because carriers never want to run empty.

One of the benefits for a carrier using the ACV platform is that we operate in other markets. So, if they've transported cars from the Carolinas to New York, they can count on having a load to pick up there. After dropping off a car in New York, they need to return home. They can then select vehicle routes that get them back to their starting point, avoiding running empty or having to deadhead. This makes our platform very attractive.

But on a per car, per mile basis, how does the cost of using ACV compare to using the transportation offered at a physical auction?

We're very competitive. Physical auctions don't usually coordinate transport, although some will within a given geography. That's typically built into your fee structure. However, we're very cost-competitive on a transportation basis. We can transport vehicles hundreds of miles without any issues. That's why the reporting on ACV's transport segment of the business is generally very strong relative to guidance.

What about the title? Does ACV intervene in any way in the title transfer?

We are indeed closely involved, although I wouldn't use the term 'interfere'. I won't delve into the complexities of titling in various states, but it's important to understand that ACV acts as an intermediary. Part of the service we provide to our buyers involves coordinating the title transfer. When a seller indicates that they possess a clean, free and clear title, they send it to ACV. We centralize title processing, inspect and validate the title status, then compile the associated paperwork for the transaction and forward the title to the buyer. This is a significant part of our operations in terms of personnel and headcount, as every title is physically handled. We receive stacks of FedEx envelopes four times a day, and there's a dedicated team and process for handling titles.

Is this an additional service for which you charge sellers?

This service is included in our fee structure. It's part of our neutral role in the transaction, as we build trust and transparency. You're not transacting directly with the seller, but with ACV, who represents the inventory and manages the title transfer. If there's an issue with the title, you deal with ACV, not the seller. We act as the intermediary to resolve any disputes.

For every car transacted on ACV, you collect both a buying and selling fee?

That's correct.

Is there an average amount for each fee?

No, this is one of the challenges with our customer client structure. It's important to understand that it's volume-based, our pricing is tiered according to volumes, and it's also influenced by the market.

It's not a flat fee, but depends on the volume transacted.

Yes, it depends on the volume transacted. There is some guidance available regarding costs. For instance, you might see marketing materials mentioning a $225 sell fee, but there's a caveat. It could be more or less, depending on the geography and the account we're dealing with. Naturally, high volume accounts have different fee structures than low volume accounts.

What's the average return rate? Or, to put it another way, how many out of, say, 100 cars bought on your platform end up being disputed or arbitrated?

Overall, ACV's arbitration rates are slightly higher than those on the wholesale side, at a physical auction. The rate might be between 4% and 8%, compared to about 2% at a physical auction. So, we do have a higher rate of arbitration, which is one of the largest contributors to our overhead costs. This includes the cost to unwind a deal or the cost of goodwill to satisfy both buyer and seller in a transaction that ends up being arbitrated.

When you say 'unwind the deal', does that mean you are responsible for transporting the car back to the selling dealer and refunding the buying and selling fees?

Indeed, that is the current operational business model. If a buyer chooses, under our existing terms of service, they have the option to cancel a deal. If the deal is cancelled, ACV may decide to bear all the costs associated with either relisting the vehicle or returning it to the seller. Often, this can be due to issues with vehicle titles, a problem that is widespread in the industry. For instance, Carvana has faced numerous issues with clean title statuses. ACV is also susceptible to these issues, although it's not as publicly disclosed, because we're B2B, not B2C.