Bartering? I’m Not A Fan!
I was approached by one of my competitors who thought I would be interested in buying his business. Anyone who has ever had this happens knows that a business owner just doesn’t want to sell their business, something is not working well, and they want out. They may not have a relative or business partner to buy their company so they go soliciting potential buyers so they can exit the company. They are looking for a succession plan!
I agreed to do a walkthrough of his company. If you would ask my wife, she would not have been surprised, as she often points out to me it was not “either this or that”, most likely, I would see things as “this and that” and away we go! As I asked questions and walked through his company, I notice his breakroom floor. It had a very nice-looking new ceramic tile floor. Now anyone who has ever worked in a manufacturing company would tell you that having a ceramic floor in the breakroom was an anomaly. So, I had to ask why?
The owner said that he did a job for a tile company, and the tile company wanted to barter to pay their bill with a new ceramic floor in his breakroom. The owner stated that it didn’t cost him anything to have it installed as the tile company discounted the installation fee so the floor would cost the same amount as the tile company’s invoice, everyone was square right! I hope that you have recognized this is not good business. I decided to go further with this project, so the owner and I signed an NDA form, Non-Disclosure Agreement. This is a legal document that restricted me, the potential buyer from disclosing the financial information of his company. What I found when I did the financial analysis was his company had a very serious cash-flow problem. This was one of the main reasons he was interested in selling his business. This did not surprise me with all the bartering this owner did in his business. He thought he was saving money, but it was a huge liability to the business cash flow.
Imagine you barter for a new ceramic floor (which you do not need) in your breakroom rather than collecting cash for your accounts receivable. Now later in the month, your utility company sends you an invoice for the electricity you used for the month. The utility company does not want ceramic tiles as payment for that invoice, they want cash but what you have are new ceramic tiles, no cash.
I would imagine the tile company could have gotten those tiles for free as a demo or they may have been a discontinued item that the tile company received credit for and was to destroy. Instead, the tile company bartered them for services and saved their cash for other things leaving the business owner I was talking with, in a cash crunch. Interestingly enough, we did initially come to an agreement and I purchased his company. In that process when I went to reconcile his balance sheet and validate the barters he was still owed for work he had completed for other companies, many of the other companies had a different amount on their books and of course, the amounts were lower than the balance sheet I was looking at. This confirms that old adage, “garbage in and garbage out.” If you must, barter with extreme caution, more important stick with GAAP principles and you won’t go wrong.