Bartering may not be the oldest profession, but probably enabled the creation of a marketplace for the oldest profession. People probably have a genetic disposition to bartering. In fact, recent studies indicate that primates have a natural disposition to fairness and by extension it will probably be found that this fairness is the key to exchanging things at ‘fair value.’
Bartering has never gone away, but it did see a mild resurgence in the 90’s when the internet boom began. Companies like BigVine.com (no longer a working website, just a parked domain leading to ads of barter sites) sprung up attempting to provide a currency of trade credits in between barter transactions to enable people to barter with items that were not equal in fair value. The concept is that Company A gives something to Company B and gets 100 trade credits(not to be confused with Vendor Trade Credits) and Company B gives something to Company C and gets 80 trade credits. Company B has to make up the difference by doing another exchange for 20 credits or make it up with a cash equivalent. There were also commissions charged for the exchange of the items, typically a percentage of the value.
If that seems a little confusing, then you probably have some inkling as to why this business plan collapsed. The internet can track the trade credit bank just fine, it can even keep up with the commissions. But all of us primate types need a fair trade and all to often many of us primate types want to provide something that gives us a good deal.
Thus valuations of what someone is giving are a little strange. Some people pump up the valuations for the trade credit to avoid having to give cash, others devalue what they are giving (usually in an ‘even swap’) to avoid paying higher commissions and to avoid paying higher taxes (tax avoidance is a crime cheating your barter broker can bring a lawsuit depending on the contract and service).
For companies that get more in credits than what they receive in exchanged ‘stuff’ they are instantly confronted with the dilemma of how to redeem trade credits. Now, in the service industry many professionals have bartered their professional services in exchange for goods or services that they need. Often times, they have a goal of providing a good service and possibly landing a customer that will seek repeat help, the repeating help paying in cash.
These days a new company called SwapThing.com has sprung up and offered up a service exchange for just that type of thing.
The big players in this industry however are not the service side professionals. Its media brokers. You might ask what does a media broker have to do with bartering stuff? If you ask that question, then you are on the right track. Its a very good question.
Many firms have opened up over the years that offer to take various types of goods and provide ‘trade credits’ in exchange. These trade credits can be redeemed in the form of partial payment applied towards a media spend. So if you are The Home Depot and you have a few million dollars worth of stuff that you can not sell at your definition of fair value, you can exchange it with a media firm for their trade credits.
You can then use these trade credits to decrease the actual amount of cash you would spend on say TV spots, or print ads, or store banners, or maybe even the orange aprons that the employees wear. The Home Depot would have to pay a fee for the privilege of course to the media firm and that fee varies depending on the the type of item they are purchasing and the dollar amount of the purchase. Now if this sounds confusing, then you will probably be mystified as to why this business model as reportedly been operating for almost 35 years.
The truth of the matter is that these media firms have sales agents that take that hard to sell stuff, and they sell it for cash. They do not put it on a barter exchange and try and get some other stuff of fair value. No they sell it for good old fashioned greenbacks. So you might ask, well why couldn’t The Home Depot sell it for cash? That would be the right question.
The answer is that they can. The problem is that they can not sell it for as much cash as they have the items listed on the books. Now any good accountant will tell you that if the item on the books isn’t worth that much in reality, then it should be revalued at Lower of Cost or Market (LCM). Bartering allows for a potential work around to this sound accounting principle. If you are an accountant reading this, you should be starting to cringe and squirm in your seat. If you are not, take a deep breath focus and start cringing and squirming in your seat, misunderstanding this point could cost you your job!
Here’s the deal. There is a great number of levels at which a barter transaction can go very very wrong. No barter deal should be entered into by anyone inexperienced in a barter exchange. If your company is considering a barter arrangement and you do not have anyone on the negotiating team that is experienced in this activity, you better hire a consultant and a good one fast. You will be best served if that consultant is either an accountant, an attorney, or a sales person and preferably all three or composed of a team of all three experienced in these arrangements.
Why do you need an expert? Because you will be negotiating with experts in barter arrangements that have been engaged in these contracts for 35 years. They are not hired consultants attempting to provide you with guidance in this transaction. Their job is to get the best deal for their company. You are up against a pro. I wouldn’t put my eight year old son on a football field playing against the Chicago Bears, and I wouldn’t put an accountant or attorney up against a media firm specializing in barter deals if they didn’t have some experience. Do not rely on your outside independent auditors for an opinion, they are not your consultants. They are your auditors.
Summary of What Can Happen if you are Inexperienced. If you go into a deal unprepared, you will likely end up with a deal that is unbalanced. You will sell your ‘stuff’ for less than its worth, and you will have to take an immediate loss for that sale on your books. In addition you will likely not receive any cash and if you do receive some it will be no where near what you could have sold the ‘stuff’ for had you done it yourself. Unless you spend a massive amount of money on media spots, and I’m talking TV commercials first other media buys second, then you may never redeem your ‘trade credits completely and you will be required to write off the unredeemable balance of trade credits as a loss potentially as early as the end of the fiscal year and as late as 1-3 years after the transaction is completed.
I have only breached the surface of this topic. If you are a consultant and looking to drum up a little extra business, and don’t mind putting a few hours or days of work on the line, then you might gain some interesting experience and possibly a positive outcome in the deal. Aim for an exchange for something and not an exchange in ‘trade credits’ unless you have positive experience in this area in the past. If you are a company contemplating a transaction of several thousand to several millions of dollars then I would advise two steps.
- Contact me through Softduit Partners and arrange a 1 hour consultation over the phone,Scratch that we stopped providing this service. 🙂
- Contact the International Reciprocal Trade Association for more information on the transaction and on the reputation of the firm involved.
If you have already done a deal and are trying to figure out what to do to utilize your trade credits and get value for your services, I’d recommend contacting me through Softduit Partners so that we can arrange to sign an NDA and setup a phone conference with your attorney and accountants.