Money Matters

Bartering: An Old Way to Do Business Has a New Name & Approach

An old way to do business has a new name---and an entirely new approach.

Illustration/Rick Geary
<p>Illustration/Rick Geary</p>

During the Depression, actors and comedians throughout the East Coast played at the Martha Washington Inn in Abingdon, Va., bartering their talents in exchange for meals. Today, cash-crunched salon owners are taking a tip from those early barterers and trading their services for products, free advertising, or the services of other professionals. But is bartering for everyone? We asked several salon owners to tell us how bartering works for them and how owners and nail technicians can avoid some common pitfalls.

If a salon owner makes a bartering agreement, it’s important to consider the impact it will have on her staff, says Gina Marsilii, owner of Perfect 10 in Wilmington, Del. “One trade that I did make was with a client who owned a direct-mail business. In exchange for giving me a $400 direct-mail piece, she got a $400 gift certificate for the salon. We’re just computerizing now, so I’d deduct the amount right on the certificate with each visit and credit the nail technician for the full amount of the service by issuing her a credit slip that goes into the payroll system. This way, the technician is paid commission on the full cost of the service.”

While owners often ask a staff member to deliver the bartered service, it’s important to pay the employee, Marsilii emphasizes. This is easiest when the employee is salaried, because there’s less resentment about delivering a “free” service that won’t necessarily lead to a new, regular client.

New Clients- A Bartering Bonus

The best trades are those that carry a double bonus by netting something you need and generating new clients. Marsilii had used a billboard advertising service and was about to stop using the service when the company offered to take gift certificates in trade for its $1,400 invoice, she says. The billboard company then gave the gift certificates to its own business clients during a “client appreciation" party.

 “Many of their clients are business people who weren’t my clients. Now that they’ve used the certificates, I’m seeing repeats,” says Marsilii. “It was a win-win situation.”

Another owner bartered with a local health club, which wanted access to his salon clients. While this can be risky, some warn, it worked well for this particular salon owner. He allowed the health club to put a box in the salon into which clients dropped their names and phone numbers to win a free-two-week health club membership. In return for simply placing a box at the reception desk, the salon owner received a $500 health club membership.

Another popular trade is for advertising. Carl Schmidt, president of Mitchell’s Salon and Day Spa in Cincinnati, Ohio, says he buys radio time for 50% cash plus 50% traded salon services.

 “Only deal with financially stable companies,” he cautions. “For me, the trade is like getting a dollar’s worth of time for fifty cents. For radio, TV, and direct mail, trades save me $100,000 a year. The radio station gives away the gift certificates to callers, so we get new clients out of the deal, too,” Schmidt says. “But if you’re giving out $5,000 in gift certificates, you don’t want the other party to use them and disappear. Know with whom you’re dealing.”

Schmidt, whose wife, Deborah Mitchell, is chairman of the board and founder of their two day spas, says both locations do about $6 million year and that the team is opening a third operation, so advertising is important to them.

 “We also do the hair for all the newscasters in the Cincinnati area,” Schmidt adds. “For this, we’re credited at the end of the newscast, and they leave the salon name on the screen for a minimum of 10 seconds.”

Mitchell also trades with Ralph Lauren, which uses salon gift certificates as incentives for its sales demonstrators; the salon gets Ralph Lauren merchandise to use as incentives for its staff.

How the IRS Views Bartering

In talking with salon owners for this story, the question we were most frequently asked was, “Don’t you have to declare barter services?”

Yes, Virginia, and the IRS isn’t Santa Claus.

Patricia Harik, an accountant with Zdonek & Wolowicz Accounting Corporation in Torrance, Calif., checked the tax service library for us and came up with these facts:

The tax code states that income can be in forms other than cash. Notes, property, and barter services (or any non-cash income) must be included in gross income, usually by both parties.

Harik gives an example involving a property owner who exchanged a rent-free apartment for a painting, from the artist who used the apartment as studio. The property owner had to declare the value of the painting, and the artist had to declare the fair-rental value of the apartment. Note that the value of the exchange, not the actual cost to the person, had to be declared. In other words, a $50 nail service has a $50 value, according to the IRS.

These declarations must be included in gross income, according to the IRS. So can they then be deducted if the trade was a legitimate business expense? Yes, but the key word here is “business.” For example, if you trade nail services for cleaning services, a nail treatment is not a business expense for the cleaner, but cleaning your salon is a business expense for you.

Incidentally, barter clubs (which are organized trade exchange businesses) that have more than 100 transactions per year must file a Form 1099-B for each person who exchanged property or services. In other words, the club must report exchanges, and those reports can be compared with your tax return. According to the Research Institute of America, the IRS has implemented a Barter Exchange Project to identify and select returns for audits, including those of barter exchanges, owners, operators, and members.

A Clean Deal

Many salon owners enter into their first bartering agreement when they trade nail services for cleaning services. In Amarillo, Texas, Kathy Hunter receives weekly salon cleaning in exchange for a weekly manicure for the woman who cleans the salon but she didn’t stop there. “I also trade for accounting services and for an answering service,” she adds. “In all cases, the other party approached me, but I knew them all as clients. You should know the person you’re dealing with well before you agree to a trade.”

Jesse Gesimondo, owner of Jesamondo in Wellesley, Mass., says clients often suggest a trade, but determining what’s fair isn’t always easy.

 “If you ‘bill’ each other at regular prices and keep a tab, it’s easiest,” he says. “I’ve traded for graphic artwork, slides for a hair show, brochures, and printed price lists. Usually, it’s a one-time thing, not an ongoing agreement.”

Other owners agree that the trade should always be “apples for apples” and most shy away from creating ongoing trade agreements.

 “If you need something in the short term, or can’t afford something you need for business, trading is a way to get it.

But a fee is a fee, and I want people to respect mine,” says Bonnie Adolph, who co-owns Naturally Nails in Baltimore, Md. “Once you start trading, people always want to make a deal,” she says “I had a friend who owned a condo at a beach, so once I traded her nail services for a weekend at the condo. Now she asks, ‘Do you need the condo?’ You open yourself up when you start trading.”

 An Uneven Exchange

Often what seems like a great deal, or even a fair exchange, isn’t. According to trade exchanges (once called barter clubs), a salon’s cost on the barter dollar works out to about 60 cents, while a restaurant’s cost on the barter dollar is about 30 cents. That’s because restaurants mark up food 100% and pay minimum wage, while salons pay 50% commission or more, plus the cost of goods. So the $50 nail service you give a restaurant owner is costing you more than the $50 meal he gives you---and it’s taking one technician’s full booking time.

 “I don’t make trade agreements,” says Pam McNair, owner of Gadabout in Tucson, Ariz. “About nine years ago, I belonged to a business-exchange club. The membership was about $250 a year and the club took 10% of everything that was traded,” she says. “Because I had access to a large group of members, I thought it was advantageous, but my accountant showed me that by the time I paid taxes on everything, I was actually losing money. There was just a lot of money moving around on paper. If people are trading to avoid taxes, they’re inviting the IRS to take a look at their books.”

Which brings up another point: The IRS treats trade dollars like cash income and expenditures (See “How the IRS Views Bartering” on page 122)

Join an Exchange Club?

Salons are frequently contacted by trade exchange clubs, because their members would love to trade for salon services. Most legitimate clubs are members of the National Association of Trade Exchanges, and most work something like this:

For a fee that can range from $300 to $750, a salon owner gets access to all the other business members. Every time an exchange takes place, the club takes a percentage; 10% is the most common. If a member gets a set of sculptured nails at your salon for $50, you give the club the member’s credit card number and the exchange club credits you $50. You can use that $50 at any other member’s establishment.

While a club may sound like an ideal way to barter your services, always keep your bottom line in mind, salon owners caution. “Remember, trade exchanges are in business to make money,” says Schmidt. “Their membership may not even offer something you want.”

On the other hand, if you use an exchange club to fill downtime or build a new technician’s book, that can be beneficial. Just make sure that what you get in return is something you really need for your business.

 “Even if the trade is for something like advertising, don’t trade for a shot in the dark,” says Marsilii. “Make certain the advertising vehicle reaches the people you want to reach.”

 Go Your Own Way

Most salon owners avoid official exchange clubs, noting that it’s easy for salons to make their own deals. If you are trading for something you truly want that potentially can increase your business---and if you know and trust your exchange partner---trade exchanges can be beneficial.

Once you’ve decided to try bartering, how do you keep the numbers in your favor? First, plan to deliver the service yourself or use a new or salaried staff member, then calculate the actual cost of what you’re giving away and compare it with what you estimate to be the actual cost of what you’re receiving. If the trade still looks good, go ahead. Keep records of the exchange, give them to your accountant, and vow not to go “trade wild.” Every time you consider a trade, salon owners say, evaluate its effect on your business and only proceed if the trade will put your business ahead.

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