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Many corporate barter companies now position what they do as a form of structured finance. Barter is essentially an accounting transaction. Its bottom line is its positive bottom line contribution It can prevent write downs. Profitable and discreet excess inventory and capacity problem solving are the only reasons to barter. Companies recognizing this axiom are usually happier than those trading for other reasons such as reducing media and other goods and services’ costs.
The Accounting Principles Board Opinion #29 stipulates that non monetary assets can be recorded as sales at quoted market prices or estimated fair value. The non monetary assets can be treated similarly to cash.
R2structures barter relationships’ financial aspects to meet clients’ performance goals, value requirements, and logistic needs by working with internal financial personnel and outside auditors. We also have created software that allows companies with inventory problems to juggle key variables to create customized barter arrangements.
There are two basic types of corporate barter deals, straight trades, without client cash involvement, and cash blends also known as receivables, requiring cash participation for credit use.
All barter transactions start with an inventory. The client identifies an inventory problem, sends samples, product lists and descriptions.
R2 then finds a buyer for the inventory compatible with the client’s distribution restrictions and bases the barter proposal on the buyer’s offer.
Under straight trade agreements, the barter company offers clients a multiple (usually 1.5-2X) of the cash generated from product resale in trade credit. A $100,000 cash offer for the inventory would yield $150,000-$200,000 in trade value. The multiple is usually the ratio of the media, services and goods’ price benchmark to the cost of providing it, plus profit. Without factoring in profit, under a 2:1 trade credit to product resale cash ratio, the barter company breaks even on a $10,000 magazine ad costing $5000 to supply to the client. After the magazine ad’s placement, the $10,000 cost is subtracted from the trade credit balance.
Straight trade contract value is limited to twice the inventory resale generated cash. A straight trade’s value may be inadequate for a client, if the resale money generated is a fraction of original wholesale. An inventory worth $1 million at original wholesale may have only $100,000 in value to the client and the barter organization’s liquidation contacts, limiting the trade credit total to at most $200,000.
Cash blends on the other hand, allow for original wholesale value recovery, providing that the client offsets media and other costs with cash payments ranging typically from 25%-75%. The problem with receivables is the cash payment aspect. The uninitiated to cash blend corporate barter find the prospect of giving an entire inventory and cash to a company in an industry with a dubious reputation (Enron even tried recruiting R2 and Reciprocal Results founder and chief executive Roy Moskowitz to run the division of the infamous company, that structured corporate barter deals.) a bit disconcerting. However, it is based on sound principles. The difference between the cash payment and the price of each credit use transaction, is the barter value received by the client.
Under a $100,000 cash blend contract, a client wishing to place a $10,000 media schedule spends $5000 to use the credits at 50% cash participation. The difference between the $10,000 price and the $5000 cash payment (also $5000) is deducted from the trade credit, leaving a $95,000 balance.
Cash blend accounts are under no contractual credit use obligation. They are not required by most trading companies to pay cash for unused credit. However, unused credit must eventually be written down.
Barter companies frequently abuse receivables by structuring arrangements of questionable client value. They profit by keeping 100% of the product resale cash without using any of it towards contract fulfillment and also profit from the media, goods and services provided to clients.
Although R2 is willing to structure pure straight trade and pure cash blend agreements to suit clients’ needs, we prefer to offer something better.
R2 combines straight trades and cash blends’ best aspects in hybrid arrangements. Hybrid accounts receive the same amount of straight trade credit up-front as they would under standard straight trades with the same cash generated from product resale and price benchmarks. After the straight trade portion’s completion, the hybrid client receives the difference between the inventory’s original wholesale value and the straight trade amount in cash blend credit. Below is an example of a hypothetical hybrid barter transaction.
Original Wholesale: $1,000,000
Resale Cash Generated: $100,000
Straight Trade Barter Credit: $200,000
Cash Blend Barter Credit: $800,000
Total Hybrid Barter Credit: $1,000,000
In this example, the client would conserve $200,000 that they would normally have to give to the barter company in cash under a traditional 50/50 cash blend.
We can also give back to clients engaging in straight trades, receivables, and hybrids a portion of the product resale money in a process called cash cost recovery. However, barter deals rarely generate sufficient resale cash to share with clients.
Companies with unused trade credits from our competitors can use us as barter consultants. R2 gives trade credit use recommendations based on our competition’s strengths and weaknesses. R2can inform consulting clients when one of our competitors is likely to have misrepresented facts or even potentially lied. We will tell you when to be vigilant and when to give slack. R2 can help with the barter company selection process, if the grave mistake of not including R2 in your barter review was made. We can outline what to look for in barter organizations and describe each of our competitors' positive and negative attributes.
Reciprocal Results s the only barter company willing to fully disclose all the financial components of the barter deals it offers to companies with underperforming assets. Our arrangements are always superior in true value and cost savings compared to what the rest of corporate barter offers.
Unfortunately, corporate finance leaders don't always properly analyze deals and often prefer things simpler, not wanting to hurt their top b-school educated brains by examining anything complex. So they do a pure cash blend deal with a large barter company, solely because of size and their personal laziness, regardless if the R2 proposal would conserve millions of dollars.
These CFOs think they perform due diligence by only looking at the barter company's size and financials, instead of reviewing how much their former remnant assets were sold for and how that resale cash is worked back into the deal. But their lack of diligence leads them to be fleeced by the actual terms of the barter contract as the trading companies keep as pure profit whatever they sell the excess inventory for and charge ridiculous cash blend percentages, as well as requiring for credit use actual cash outlays greater than what most organizations normally pay without the trade credit subtracted from the total price. These CFOs are also more likely to violate Sarbanes-Oxley.
Reciprocal Results < Reciprocal Get>and R2 have a vast network of key executive contacts at top companies in most industries. CEOs, presidents, CFOs, controllers, marketing, sales, operations and advertising vice presidents, product managers, ad agency personnel, publishers and other media executives are among the people we can introduce to clients for mergers and acquisitions, joint ventures, the opening of new markets and as new customer sources.