Corporate-Barter Transaction Types
On one hand, there are nearly limitless ways to construct a successful transaction while encompassing assets, ongoing business expenses, funding needs, fulfillmentThe process through which ICON delivers the goods and services clients have purchased from ICON using trade credit or cash or both. Also referred to as the back end of a corporate barter transaction. and other considerations. On the other, it’s really quite simple. There are three basic deal structures to create value with corporate barterThe creation of value by exchanging a client's unwanted or undervalued asset for the promise to purchase over a period of time from the corporate-barter company a defined set of goods and/or services, called fulfillment. (Sometimes mistakenly referred to as Corporate Trade.).
A barter candidate can trade an underperforming or unwanted asset for the following:
Trade CreditAn alternative currency used in the corporate barter industry; one of ICON's financial options. (Note that this term is properly used only in the singular, i.e., never trade credits.)
The corporate-barter industry was founded on the trade-credit transaction. The credit here is toward future purchases from ICON. Often (but not always), this takes the form of media, such as TV advertising flights, radio spots, magazine pages and digital advertising. In other cases, the client may procure common ongoing business services, such as shipping, air travel and hotel reservations. Collectively, these are called Fulfillment Services.
Trade-credit transactions are typically preferred by clients that require flexibility – such as a company that lives with unpredictable business cycles or seasonal promotional periods. A trade-credit transaction holds an expiration of up to five years. However, most companies consume their entire trade-credit balance within 18 months to 2 years.
Here’s how one ICON client – Monro Muffler Brake – used trade credit to its advantage.
CashU.S. federal banknotes; one of ICON's financial options. (also known as a VendorAny company that delivers goods or services to another company through a business transaction. Subscription Agreement - or VSA)
Some of ICON’s clients prefer to receive cash as payment in a barter transaction. The reasoning varies by client, but in this scenario ICON simply provides cash as payment to purchase an asset or fund legitimate business expenses. These expenses can run the gamut – from monetizing receivables to financing an acquisition, funding a new product line or purchasing incremental media.
In a cash-only transaction, the client sells an asset to a barter firm at the typical barter multiple of two to three times market valueThe price at which both willing buyers and sellers will transact business, the highest value being full market value. receiving the proceeds in cash immediately. The barter firm essentially becomes an alternative financing entity for the client. In return, the client enters into a Vendor Subscription Agreement (VSA) and purchases a predetermined amount of goods and services through ICON.
See our CFO Corner for additional information and U.S. authoritative accounting guidance for VSA transactions. Read more.
More About Vendor Subscription Agreements (VSA)
A Vendor Subscription Agreement (VSA) is different from a trade-credit transaction in several ways.
- ICON purchases the asset for cash, not trade credit.
- If the asset is surplus or distressed, ICON initially incurs a financial and tax loss.
- The seller receives a higher cash value for the asset.
- Cash has an inherent time value of money advantage for the seller. There is no interest cost if the fulfillment purchase obligation is met.
- The economic leverage that is attractive to the seller in a trade credit barter transaction is paid to the seller in advance rather than over time as a reduction to the fulfillment cost.
- A VSA creates a fulfillment obligation (legal) for both ICON and the seller. A trade-credit transaction creates no obligation other than ICON's promise to deliver. ICON and the seller have a right not an obligation, to redeem the trade credit.
- Over time, the economics of both transactions are similar for both ICON and the seller. Most sellers like cash better than trade credit, given the choice. ICON takes a significantly greater financial risk with the VSA transaction, while the seller has significantly less financial risk.
- The accounting for a VSA transaction may be more favorable than the current environment for trade credit transactions. This is especially true for public companies.
Here’s how one ICON client – DirecTV – generated needed cash using corporate barter.
Creativity Prevails – Max Flex: A Combination of Trade Credit and Cash
This is another area in which ICON has been an industry innovator. For clients that want the flexibility of trade-credit and the certainty of cash, ICON can offer a combination of the two.
Since client needs vary greatly, ICON customizes each transaction to satisfy the most challenging of situations.
Here’s how one ICON client – a North American automotive manufacturing operation – created a unique blendThe ratio of cash to trade credit used as payment for fulfillment services purchased through ICON. of cash and trade credit to its advantage.