Business Law: Is Barter A Smart Business Model?

By Nina Kaufman, Esq.

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 . . .

Read on for more...
 

© 2004-2009 The Legal Edge LLC. Nina L. Kaufman, Esq. is an award-winning business attorney, author, and speaker. Under her Ask The Business Lawyer umbrella, Nina offers easy-to-understand business law resources that protect small businesses and save them money. To learn more, and receive our FREE "LexAppeal" ezine, visit http://www.GreatBusinessLawTips.com  or contact Contact Us. This article is for your general information only. Be sure to consult with an attorney regarding your particular situation to make sure you get the specific advice you need.

Nina Kaufman, Esq. Award Winning Business Lawyer, Author & Speaker