Thursday, March 4, 2010

It's a Bad Bet?

I was discussing my criteria for screening TRE Sellers with a friend the other day. This is a knowledgeable person who understands TRE quite well but is not a Member.

I told him what percentage of the TRE Sellers are on my “Do Not Bid” list. He asked how many losses had been incurred by Buyers who WERE willing to buy from those Sellers. I explained that, as far as I know, there hasn’t been an actual write-off at this point.

His reaction was “so you’ve bet wrong on X percent of the Sellers so far.”

NO! I don’t accept that analysis.

The fact that a loss has not yet occurred does not mean that buying would have been a “good bet”.

The fact that I might walk alone down a dangerous street late at night and not get mugged doesn’t mean it was wise to take the walk. And if I did it five times and didn’t get mugged, well, it was still unwise.

I was looking at the updated financial statements of one of the Sellers on my “Do Not Bid” list today.

A few data points:

 Accounts Payable = 4 times Accounts Receivable

 Current Liabilities = 10 times Current Assets

 Negative Retained Earnings; Negative Equity; Negative Net Income; Negative Cash Flow from Operations; Negative Cash on Hand.

Now, the Buyer’s recourse in the event of a problem with payment is to the Seller.

The notion that there are no circumstances under which an Account Debtor might justifiably refuse payment is a fiction.

In such a case the Buyer must look to the Seller: not to the Debtor, not to the Exchange, and not to the individual owners of the Seller. No---just to the corporate entity that is the Seller. (To be fair, there is a possibility that excess cash received by TRE on the Sellers account might be available to cure a default but that should hardly be counted on.)

There are those who might be willing to look at the financials I was looking at this afternoon and bid anyway. There are those who might bid without looking at the financials at all. And they might well avoid being mugged…once or twice or five times.

That doesn’t persuade me that buying would be a “good bet”.

Because, based on the Seller’s own, internally-prepared financial statements, it is unlikely to be able to cure a significant Account Debtor payment failure.

It’s a great thing to have really high quality Account Debtors. And I’ve commented recently and quite favorably on the success TRE has had in bringing a high percentage of good credit Debtors to the Exchange.

But at the end of the day, if the Seller can’t make good on an invoice gone bad, the Buyer is going to have a problem.

The Seller I described above is on my “Do Not Bid” list and it will stay there until its financial condition dramatically improves, no matter how many auctions it might successfully complete.


  1. Good point.. but if TRE will always route the payment directly to the buyer, as long as the debtor pays, quality of seller does not matter that much in the circumstances

  2. Dear Anonymous,

    But that's my point!

    What if the payment is NOT made. TRE does NOT require that the Account Debtor verify that the goods or services it has received meet their requirements OR that the invoice has been approved for payment. They only verify that the invoice is in the AP system, which is not the same thing at all. And they don't verify ALL invoices any longer. They rely on a sampling system.

    My point here is that, because of the limited nature of the TRE verification process, the condition of the Seller is actually quite important.

    Because there are cases in which the Debtor might quite justifiably refuse payment.

    And in such a case, the Buyer has to look to the Seller for redress. If the Seller doesn't have the capacity to make good, the Buyer has a real problem.

    Thanks very much for the comment. It puts the issue clearly on the table!