Barter Deal

What is a barter deal?

Barter deal (German: Tauschgeschäft) refers to an agreement in which two companies exchange goods or services with each other. No money changes hands, or only part of the consideration is provided in money. Each side pays for the service received with one of its own. The term comes from the verb to barter, meaning to trade goods or services without money.

The principle is familiar among tradespeople: an electrician renews the wiring in a painter's house, and in return the painter paints the electrician's flat. Neither pays the other any money, and yet each has received a service with a market value, which counts for tax purposes like a sale.

Barter deals are found above all in young companies with tight liquidity and spare capacity. A design agency, for example, designs the brand identity of a data centre operator and receives server capacity in return. A software house develops an application for a management consultancy and in return receives advice on its pricing strategy. The basis is an exchange or cooperation agreement; for tax and accounting purposes, there are two separate sales.

Advantages and disadvantages of a barter deal

The most important advantage is preserving liquidity. The company receives a service without spending money and pays for it with capacity that would otherwise go unused. In addition come contacts and references if the barter partner is itself an interesting customer or multiplier.

There are disadvantages as well. In valuing the two services, the parties' ideas often diverge. The scope and quality of services are hard to describe, which encourages misunderstandings. In addition, the exchange is more laborious legally and for tax purposes than a transaction for money, because two service relationships must be documented and invoiced.

Process and contractual basis

1. Identify partners and services: which service each side provides and which it needs.
2. Fix values: usually the price each side would charge any other customer (arm's-length price); differences are balanced by an additional payment.
3. Put the contract in writing: with scope of services, quality, period, acceptance, rights in work results and consequences of defective performance.
4. Provide the services: according to the agreed schedule and with proof of delivery.
5. Invoice: Each side issues an invoice for its service with value added tax (VAT) shown separately; to the extent the values match, no money flows.

Under civil law, exchange is regulated in Section 480 of the German Civil Code (Bürgerliches Gesetzbuch, BGB), which declares the rules on sale applicable by analogy. Each side is thus seller of its service and buyer of the counter-service, and the rights in respect of defects apply in both directions. If services under service or work contracts are exchanged, the result is a contract similar to an exchange or a mixed contract, to which, depending on the service, the law on contracts for services, contracts for work or sale applies.

Tax and accounting for a barter deal

VAT law distinguishes supplies of goods, that is, the handover of objects, and other services, such as services or licences. An exchange exists if the consideration for a supply of goods consists of a supply of goods. A transaction similar to an exchange exists if another service is remunerated with a supply of goods or another service (Section 3(12) of the German VAT Act (Umsatzsteuergesetz, UStG)). In both cases, the value of each transaction is deemed the consideration for the other (Section 10(2) sentence 2 UStG). Both sides therefore account for VAT. They can deduct the VAT from the partner's invoice as input VAT under the general rules, that is, offset it against their own VAT liability.

In bookkeeping, revenue and expense are recorded separately, because Section 246(2) of the German Commercial Code (Handelsgesetzbuch, HGB) prohibits netting expenses against income. An exchange therefore increases revenue in the income statement and at the same time expenses or, in the acquisition of an asset, its acquisition cost. The transaction is not tax-neutral. In an exchange of assets, that is, items of property that can be recognised on the balance sheet, the acquisition cost is measured by the fair market value of the asset given up (Section 6(6) sentence 1 of the German Income Tax Act (Einkommensteuergesetz, EStG)). If this is above the book value, a taxable gain arises in the amount of the difference (hidden reserves).

In due diligence, the values of goods handed over count as part of the cost of customer acquisition. Investors therefore include them in the LTV/CAC ratio, which sets the value of a customer against the cost of acquiring it.

Barter deals in due diligence

For investors and buyers, barter revenue is of lower quality: there is no cash receipt behind it, and its value rests on an agreement rather than a market price. In financial due diligence, the review of the financial figures before an investment or a purchase, it is therefore identified separately and adjusted in the analysis of revenue quality.

Recurring barter revenue is stripped out of annual recurring revenue (ARR) before a revenue multiple is applied, that is, a factor by which revenue is translated into a company value. Because revenue and expense rise by the same amount, profit usually remains unchanged, but revenue, growth and margins appear distorted. Anyone who discloses barter deals voluntarily in the data room, with contract, valuation and share of revenue, avoids their later discovery damaging confidence in the other figures.

Worked example: a barter deal in revenue, growth and valuation

A software company reports revenue of EUR 6.0 million and EBITDA (earnings before interest, taxes, depreciation and amortisation) of EUR 0.9 million. In the previous year, revenue excluding barter deals was EUR 4.8 million. In the current year, it exchanged licences worth EUR 0.4 million for trade fair space and consulting of the same value, of which EUR 0.3 million as ongoing annual contracts.

• Revenue with cash receipt: 6.0 minus 0.4 = EUR 5.6 million
• Growth reported: (6.0 minus 4.8) / 4.8 = 25.0%; adjusted: (5.6 minus 4.8) / 4.8 = 16.7%
• EBITDA unchanged at EUR 0.9 million, because the barter revenue is matched by an expense of EUR 0.4 million
• EBITDA margin reported: 0.9 / 6.0 = 15.0%; adjusted: 0.9 / 5.6 = 16.1%
• Valuation effect: EUR 0.3 million of recurring barter revenue × an assumed revenue multiple of 5 = EUR 1.5 million less enterprise value
• VAT: Both sides each owe 19% on EUR 0.4 million = EUR 76,000 and deduct the same amount as input VAT

The profit is reported correctly, but the picture of size and growth is not. The adjustment in due diligence corrects this difference.

Distinctions: barter deal, media for equity and contribution in kind

• Media for equity: a special form in the start-up environment in which advertising services are provided not in exchange for a service but in exchange for shares in the company.
• Contribution in kind (Sacheinlage): the contribution of an asset to a company in return for new shares, with strict rules on capital contribution under the German Limited Liability Companies Act (GmbHG).
• Set-off (Aufrechnung): the extinction of two claims of the same kind, usually money against money (Section 387 BGB). If an exchange is settled through two invoices that are netted against each other, it remains an exchange economically.
• Countertrade (Kompensationsgeschäft): a form of foreign trade in which an exporter undertakes to purchase goods from the buyer's country in return. Often these are two linked money transactions.

Common mistakes

• No VAT charged. Anyone who treats the exchange as a transaction without consideration still owes the tax, and the partner lacks the invoice for the input VAT deduction.
• Only the balance booked. If revenue and expense are netted, the entry breaches the prohibition of netting and distorts revenue and cost structure.
• Unclear description of services. General promises such as “consulting as needed” lead to disputes over scope and quality.
• Barter revenue not flagged. If it is mixed with revenue against money in reporting, growth and recurring revenue show values that are too high.
• Inflated valuations. If both sides set their services above the arm's-length price, revenue and expense rise equally. In due diligence, this is regarded as an artificial inflation of revenue.

Frequently asked questions

Is VAT payable on a barter deal?

As a rule, yes. An exchange and a transaction similar to an exchange are taxable like a transaction for money; only a business that uses the small business exemption invoices without VAT. Where both sides have full input VAT deduction, tax and input VAT cancel each other out; the obligations to invoice and to file returns nevertheless remain.

What does an invoice for a barter deal look like?

Like an invoice for a sale against money, with all mandatory particulars under Section 14(4) UStG. The value of the counter-service is stated as the consideration and VAT is shown separately; it is customary to add a note that payment is made by the partner's counter-service. Between domestic businesses, the rules on electronic invoicing also apply.

What value is used for the services exchanged?

The value of the respective counter-service is decisive. In practice, the parties base this on the prices they would charge third parties at arm's length and document them in the contract.

Does a barter deal need a written contract?

As a rule, not by law, but it is advisable as proof to the tax office and investors.

Do barter deals harm the valuation?

Not if they are shown transparently and make up a small part of revenue. It becomes critical if growth or recurring revenue rests substantially on barter deals and this becomes visible only in due diligence.

The Roemer Capital view

When we prepare a funding round or a sale, we ask specifically about barter deals and show them as a separate item in the revenue schedule. The associated contracts and valuations are placed in the data room so that investors and buyers can follow the adjustment instead of making it themselves.

As a fractional CFO, that is, finance leadership on a temporary basis, we ensure that barter revenue is shown separately in reporting from the start. We coordinate the bookkeeping and VAT treatment with the client's tax adviser.