Inventory remarketing is a critical part of our transaction. Our discussions concerning acceptable channels and outlets start well before we enter into a purchase agreement. It is important to understand that for a trade transaction to work, there needs to be some acceptable channel of distribution.
We once had discussions with a potential client that sold apparel direct to consumers. The brand was only available through the client’s own stores. The brand could be damaged if items were sold through any other outlet. The client was concerned about confusing consumers — as well as how to deal with potential returns from inventory that may have been purchased through an alternative source.
In this scenario, barter was not the best solution for this customer, and we recommended they consider other options.
Our trade purchase works most successfully when the client has a problem and is unwilling to accept the value offered from secondary channels. The client could be concerned about the sale price or the expense and time of selling into the secondary channels. Those are issues that can be solved through a trade transaction. Net Trade will pay significantly more than any other buyer and we will eliminate all of the expenses associated with the under performing asset.
Part of a company’s normal course of business is producing some amount of underperforming assets. These assets can generate a significant positive return opportunity. Companies will typically dispose of the unwanted asset for 20-30 percent of the asset’s original value.
Corporate trade transactions can generate a 70-80 percent greater return. Net Trade purchases the unwanted asset and issues the client a trade credit, which is our form of currency. The trade credit is used along with cash to purchase goods and services from Net Trade. All the goods and services supplied by Net Trade are independently valued at the client’s 100 percent cash cost. Our clients generate value from the trade credit portion of the payment and the subsequent cash savings. Some of our clients have used the corporate trade strategy to fill surplus capacity. This program generates incremental new customers and the surplus capacity is sold for the full value.
Clients typically use the trade credit to purchase media through Net Trade. The price of the media we provide is set to what the client would have paid, except that the client will pay a combination of cash and trade credit (the unwanted asset). The trade credit utilization generates the cash savings and ultimately the bottom-line value of the corporate trade transaction with Net Trade. Our transaction has no other fees, and the media value is net of any agency commissions the client might have paid to its current agency.
We start by performing an in-house analysis of the asset value. Our analysis takes into account any restrictions, including channel or geographic restrictions. Our team can determine a value in a matter of days. On average we will pay three to five times more than the traditional liquidation channels. Our purchase is not conditional based on the recovery, and we always act as a principal. We do not offer inventory into the marketplace during the evaluation process to avoid disrupting the client’s ability to liquidate the inventory if they choose not to enter a trade transaction.
Please keep in mind: the greater amount of trade credit issued to the client, the greater the amount of purchases the client will need to make through the trading company to recover the full value of the trade credit. We take into consideration the amount of trade credit and the clients appetite to exhaust the trade credit balance in a timely manner.
Trade credits do expire four years after issuance. We want to make sure that a client can and does use their trade credit balance. We have found that the expiration date leads to the client determining the spending amount and timing needed to use the entire balance before they enter into a transaction.
The cash-to-trade-credit ratio is determined by an analysis of the client net cost for the good or service being purchased from the trading company, compared to the trading company’s internal cost. The corporate trade company has made investments in media properties and technology providers and these investments produce a cost basis below market. The cash-to-trade-credit ratio takes into account how much below market the trading company’s cost is, and not every aspect of a media buy will use a trading company’s media trade inventory. In many cases an analysis of a client’s media plans and costs is provided by Net Trade and the cash-to-trade-credit ratio is part of the purchase agreement. Depending on the liquidation value of the inventory acquired from the client, some of those proceeds may be used to lower to cash and increase the trade credit ratio of a purchase made by a client.
The trade company has two potential revenue sources. The liquidation of the asset acquired from the client and a small margin from purchases of goods and services made by the client. The majority of the income comes from the asset liquidation. There are exceptions, but generally the asset liquidation drives most of the trading company’s income.
FASB Topic 845 Non-monetary Transactions including topics 845-30-17 to 20.
The Trading company does not offer any accounting advise and all of our clients seek their own accounting and legal advice.