Wednesday, May 12, 2010

The Wheat from the Chaff

I’ve written before about the need for TRE to provide Buyers with the means to discriminate among auctions offered: a screening capacity based on a range of filtering criteria.

Some of those filters would be relatively easy and probably inexpensive. Those would include such straightforward criteria as: size of auction, auction experience of Seller, auction experience of Account Debtor, Seller industry, etc.

There should also be a Buyer-defined screening capacity that would eliminate from the displayed auctions any Sellers, Account Debtors (or classes of either) that a Buyer might choose to ignore.

When there were only a handful of auctions live at any one time it was possible, after some experience, to just “know” who was who and what was what. But now there are frequently 30 or more live auctions at any one time.

The day will soon come, I suspect, when that number will be 100.

And, if the Exchange were to grow to the size of 10% of the current factoring market in the US, it is likely that there would be an average of about 1,000 auctions per day.

So TRE needs to be working on adding those relatively simple screening functions. Hopefully they are.

The other screening metric I’ve argued for in the past is a Seller-quality rating system. I’ve suggested that an affiliation with a third-party credit rating agency might provide an arm’s-length approach to both analyze differential risk and support better informed pricing.

Since I last wrote on that subject TRE has brought on many new Sellers and both they and we and, presumably, the rest of the Buyer community have gotten more experience in analyzing the financial information made available on TRE Sellers.

Tuesday afternoon, in our shop, is the time when we look at the financial information on all new Sellers brought to the Exchange in the prior week and the financial statement updates posted by existing Sellers.

We then decide whether the new Sellers go on the “OK to Bid” list (which would still be conditional, requiring a certain level of experience) or the “No Bid” list.

And we decide whether new financial information posted by existing Sellers changes our prior decisions about Seller acceptability, for better or worse. (And that subsequent information HAS caused us to move Sellers from OK to Not OK, and vice versa.)

There have been several Tuesdays recently when the quality of the information available has caused more Sellers to end up on the “No Bid” list than I’d like and maybe more than actually SHOULD be on that list.

Unfortunately, we sometimes just can't really TELL whether a Seller is of lesser financial strength than we’d like. It’s too often the case that the numbers just look so odd that we can’t be comfortable that we really understand them. And if we can’t understand them they go on the ‘No Bid” list.

That might be fair or unfair in terms of the actual financial health of the Seller but if the Seller can’t present its financial statements in way that makes a believable case for its health, it’s got only itself to blame.

The books of privately-owned businesses often reflect idiosyncratic practices and motivations – to state the case kindly.

But, since the TRE Buyer has to look to the Seller for ultimate recourse, TRE Sellers are going to have to be led to adopt financial statement presentation methods that are more accurate, understandable and generally accepted.

But that would just get us to the point where we could apply whatever analysis tools we think appropriate in decision-making. Until the data available appears to be reliable enough to analyze credibly, the selection of analysis tools and methods is a moot point as to that Seller.

Coincidentally, both Bill Gross of PIMCO and Professor Roger Altman of “Z-Score” fame, have written recently about rating tools, agencies and analysis methods.

In our next post we’ll comment on their recent work as it might apply to the analysis of TRE Sellers.

Bottom-line here, though: while TRE can't be responsible for the Seller's financial statements, it CAN and SHOULD advise both existing and prospective Sellers about the parameters of acceptable statement preparation and perhaps provide referrals to accounting professionals who could help clean up the Seller's numbers.

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