Joint IRTA/NATE Advisory Memo for Sellers of a Trade Exchange
Published: May 15, 2018
IRTA and NATE have teamed-up to provide an important industry-wide advisory memo for sellers of trade exchanges. The memo is intended to educate trade exchange sellers’, so they can make informed decisions regarding the terms and conditions of their potential sale.
Like any other industry, a fair amount of acquisitions take place every year in the barter industry. It is important for trade exchange owners to know their rights and ask astute questions of potential buyers. A well-informed seller assures that they will maximize the value of their exchange by selling to a bona-fide purchaser who can fulfill all contractual promises regarding future deliverables.
Sellers of exchanges are often presented with an “earn-out” offer from prospective buyers which has little, or no up-front deposit money from the buyer. The seller is told that he/she will receive future residual revenue from the increased transactions that are promised to occur when the seller’s operation folds into the new larger group. In addition, the buyer often holds-out the carrot of a large future pay-day for the seller if, and when, the larger group sells to “a big investment group.”
This advisory memo provides important advice for sellers to make sure they conduct a thorough and intelligent due diligence assessment of prospective buyers of their exchange.
Distinction Between the Assets and Liabilities of the Managing Exchange vs. Assets and Liabilities of the Members’ Exchange System
It is critical for sellers to have a complete understanding of the difference between the assets and liabilities of the managing exchange vs. the assets and liabilities of the trade exchange system itself. Buyers of exchanges sometimes will commingle the two, which can result in an inaccurate valuation of both the seller’s exchange, as well as the buyer’s exchange.
In short, the managing exchange and the members’ exchange system have two separate balance sheets. Because the actual legal liability for the redemption of goods and services in a barter system lies collectively between the members of the exchange themselves, the exchange members’ negative trade balances are categorized as assets, (since they are an account receivable to the member exchange system), and positive trade balances are considered liabilities, (since they are an account payable to the member exchange system). Therefore, logic dictates that trade dollar loans between exchange members are classified as an asset on the members’ balance sheet. For a more detailed review of these issues, see the attached Exhibit “A,” IRTA’s February 7th, 2017 Advisory Memo on Assets and Liabilities.
The managing exchange’s assets are limited to the cash and trade revenue it receives from transaction fees and/or monthly fees, plus exchange-owned inventory, furniture and equipment. IT IS IMPROPER FOR THE MANAGING EXCHANGE TO TRANSFER ASSETS OF THE MEMBERS’ EXCHANGE SYSTEM TO THEIR BALANCE SHEET – TO DO SO MISREPRESENTS THE TRUE VALUE OF THE MANAGING EXCHANGE.
The seller should ask the potential buyer the following questions to determine if the buyer is adhering to acceptable barter accounting principles:
- Where and how does the seller record the positive and negative balances of the exchange members? The members’ negative balances should be recorded as assets and the members positive balances should be listed as liabilities on the MEMBER EXCHANGE’S balance sheet.
- How does the buyer exchange record the seizure of a positive trade balance? The positive trade balance should be deposited into the systems bad debt reserve account. It should not be deposited into an operational account owned by the managing exchange.
- What are the parameters for the buying exchange when they decide to seize a members’ positive balance? The buying exchange should have a fair policy that respects the members’ rights to use their positive balance, in accordance with the reasonable terms and conditions of the barter agreement the member signed. The acquiring exchange should not use unreasonable and harsh fee increases as a leveraging tool to seize the positive balances of members of the acquired exchange. NOTE: The fair treatment of members’ positive trade balances is critical after an acquisition has been completed. IRTA & NATE have received complaints about acquiring exchanges seizing members’ positive balances simply because the acquired member refuses to pay the acquiring company’s new increased monthly fees and/or increased transaction fees.
- Will the buying exchange honor all direct reciprocal accounts of the seller? The buyer should agree to accept ALL direct reciprocal accounts of the seller – the buyer cannot pick and choose which accounts they will absorb on the transfer. Also, make sure the buyer will honor any UC or BANC inter-exchange balances of the seller.
- Does the buying exchange demand that prior reciprocal accounts be transferred to an interexchange platform, or the account holder will forfeit their trade balance? Like #3 above, the acquiring exchange should not force a member with a positive trade balance to join an interexchange system or be threatened that if they don’t agree to transfer their balance to such inter-exchange platform, they will lose/forfeit their balance.
Additional Sellers’ Due Diligence Checklist
Sellers of trade exchanges should also cover the following additional areas:
- Insist that the proposed buyer sign a non-disclosure agreement, (NDA), so as to protect your Membership list and other critical financial information.
- Contact IRTA and NATE to inquire about the most current ratio formulas for determining the value of your trade exchange. Contact your CPA or attorney and ask their opinion about appropriate valuation formulae.
- Utilize IRTA and NATE to get the word out to the industry that you are interested in selling your trade exchange.
- Is the buyer a member of IRTA/UC and/or NATE/BANC? If so, contact IRTA or NATE to verify the buyer is a member in good standing.
- Have any Ethics Complaints been filed in either organization against the buyer?
- What software is the buyer using? Contact the software provider to verify their account is in good standing.
- On Google search, type-in the buyer’s name and company name and type the word “fraud” and “scam.”
- Check internet fraud sites for any derogatory reports about the seller.
- Call established mature barter exchanges, who have been in the barter industry for over 10+ years, and ask them what their experiences have been with the buyer.
- If multiple buyers are pursuing purchasing your exchange at the same time we recommend that you keep the discussions separate to avoid any issues that could arise by making certain matters available to other parties.
- Does the buyer have any outstanding IRS issues? Any unpaid 941 payroll taxes? Any 1099B Non-Matching TIN civil penalty issues?
Additional information and Documents the Buyer Will Expect to Review
- Members’ Exchange Information:
- a. All member and house account trade balances
- Member trading history
- Fee structures and past due fees.
- Membership agreement
- Rules of trading
- Managing Exchange Information:
- Financial statements and tax returns
- Staff arrangements and/or employment contracts
- Franchise agreements
Asset Purchase vs. Buying the Managing Exchange
Typically there are two types of sales contracts in the barter industry; 1) an asset purchase, whereby only the trade exchange members’ accounts are being sold, or, 2) a sale of the managing exchange whereby the liabilities of the managing exchange are being sold as well, along with the trade exchange members’ accounts.
When an asset sale occurs, the managing exchange entity continues-on after the asset sale is completed. The owner’s of the selling managing exchange remain responsible for the managing exchange’s liabilities, the reverse is true with a sale of the managing exchange itself – all liabilities are passed to the new acquiring company when the managing exchange is sold.
Regardless of which type of contract that is used, it is important that ALL barter accounts in the system be transferred to the buyer – the buyer cannot agree to only buy selected accounts, (aka “cherry-picking).
When to Announce the Sale
It’s important to not announce the sale of your trade exchange until the transaction has legally closed and all funds have successfully been transferred.
The signing of a letter of intent, (LOI), does not guarantee that the transaction will be finalized. There are a myriad of hurdles that need to be cleared after the LOI is executed.
Selling a trade exchange is a big decision. By following the guidelines set forth in this memo, exchange owners will be better prepared to make the right decision about selling their exchange. Well-informed sellers assure that a fair price for their exchange will be achieved, and the sales agreement will include equitable terms and conditions that increase the probability that the buyer can fulfill any future financial deliverables.