Is Barter A Smart Business Model?

Posted on January 22, 2015 in Business Transactions

I’m often asked by cash-strapped entrepreneurs whether they could “pay” me through barter – exchanging my legal services for whatever it was they were offering. And there’s always a rags-to-riches tale that can be told where the young business owner got her start (and her company got a real boost) because she was able to procure desperately-needed services without making an outlay of cash. But does barter make sense in every case . . . especially for your business? The short and obvious answer is . . . it depends.

Barter can take several different forms. It can be a direct swap of services or products. However, both participants must be honest about the value of their services and be prepared to perform. Like a cash transaction that’s not put in writing (as many barter relationships are not), if you’re on the short end of the stick where the other person hasn’t performed, your recourses are limited. The lack of clear terms can be a problem. As a young lawyer, I bartered legal services for tech support services from “Jeff,” who was in my leads group. I had tech support needs (with a computer, who wouldn’t?), but Jeff kept putting off the legal work. When he needed money, Jeff unilaterally cancelled the arrangement and demanded that I pay him cash for the balance immediately. That was an unpleasant surprise.

There are barter clubs, which developed a system of “trade credits” so that you can spend your “barter dollars” within the community. This helps ensure that the barter participants stay in balance. It can also introduce you to a larger community of those willing to barter, rather than just a one-on-one relationship. But it also often means that you have to pay a membership fee (after all, someone has to keep track of all of the entries). It’s important to look into these clubs carefully – the IRS audited a number of barter clubs in the late 1970s/early 1980s because they weren’t keeping proper track of the credits. Also be sure to ask about the number of exchanges actually made, as some of the clubs can be more interested in selling memberships than serving their membership.

Finally, for larger transactions, there are barter companies that keep their own database of other businesses willing to barter. Exchanges can involve three or more participants . . . which is why it’s helpful to have a professional in the mix ensuring that the trades are mutual and fair. For example, a computer company might want ad space in a magazine. The magazine might need rental cars for its reporters on assignment. In turn, the rental car company might want to give a premium to its larger customers by giving them computers.

To work with barter companies, it’s important that your business show a good profit margin.  Also note that barter companies receive a commission on the transaction (sometimes, in the form of cash, stock options, or barter). 

So how can you determine if barter would work for your business?  Ask yourself the following:

1. Do I really have a need for the product or service being offered (or is it just nice to have)?  I was asked by a brand-new bakery to barter cakes for my legal services.  I happen to love cake, but I don’t need it in the quantities that would be exchanged.

2. Do you feel good about the product or service being offered?  Who’s asking you to barter?  Is it a fledgling company with no track record and little funding where the owners have only a moderate background in their field, and sometimes haven’t even bothered to put together a business plan – especially the financial analysis, which would help them determine their pricing, profit margins, and other significant financial markers?  Would you feel comfortable taking a gamble on (1) whether you’ll be satisfied with the product or service, or (2) whether they’ll be in business in 6 months?

3. Does the transaction make financial sense for you?  Especially for services exchanges, what does an hour of your time really cost you?  How much of a profit do you make?

4. Are you detailed-oriented enough to do the recordkeeping?  If this will be an ongoing relationship, are you prepared to keep track of what is given and received and the dollar value thereof?

5. If you are using a barter club or company, have you checked the company background?  Have there been any recent lawsuits from disgruntled customers?  Any government investigations?  Are there others in the club who offer what you do?  If not, is that a good thing (little competition) or a bad thing (little opportunity for exchange)?

6. Is your barter partner willing to put the arrangement in writing?  Even if no money is changing hands, remember that you are exchanging things of value.  How long will the arrangement go on?  Will you have the right to demand cash at any point?  At what point can you stop providing if the other hasn’t been giving?  Protect your “investment” in the barter opportunity, just as you would want to protect your right to get paid under any other contract.

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