Founder Trades Up to Real Estate After 27 Years : Company’s Sale Reflects Steady Decline in the Barter Business

A few years ago, the barter business was getting all kinds of publicity. Companies would increasingly do business with one another on a barter basis, it was predicted, in networks that connected them in sophisticated systems of non-cash exchange.

Business Exchange Inc., a North Hollywood company that has been at it since 1960, once ran the industry’s biggest barter exchange and was the concept’s foremost exponent.

But Business Exchange is no longer in the barter business. Earlier this month it sold its nationwide network, complete with its mainframe computer, to a La Canada Flintridge anesthesiologist for $1.4 million in cash and notes, plus 500,000 of the company’s own barter credits.

The sale price is an indication of just how far things have slid in the business that historically accounted for almost all of Business Exchange’s revenue. Less than three years ago, another buyer offered roughly $2.5 million for that business as part of a larger deal, but the financing fell through.

The sale is also something of an anti-climax for the career of Business Exchange’s founder and controlling stockholder, 65-year-old Marvin J. McConnell. A pioneer in the industry, he sold his company’s barter business after membership had dropped from 17,000 to 10,000 in the past three years. The business lost $136,055 on revenue of $2.4 million for the fiscal year ended July 31.

Tells Reason for Sale

McConnell says he sold the barter business not because it has no future, but because, at his age, long-term growth is not his biggest goal. But the business has already failed in that respect: the company he founded 27 years ago with nearly $1 million of his own money now has a total stock market capitalization of just $2.1 million, of which the McConnell family owns between 45% and 48%--or about $1 million worth.

In contrast, $1 million invested in 1960 at an after-tax return of 4% would have produced nearly $3 million by now.

In fact, these days, publicly held Business Exchange may look a lot better shorn of its barter business. The surviving company is basically a shell, consisting of McConnell, his secretary and $1 million in tax credits to offset future profits. McConnell says the company has a $2-per-share book value. Business Exchange stock closed Monday at $1.25 bid.

Real estate now accounts for most of his company’s assets, and much of that property was acquired with its own barter credits. Business Exchange also appears on the road to salvaging its troubled $23-million condominium project in Pomona, which could offer a healthy cash flow.

The barter business that McConnell founded is now called BX International and is owned by Sherman Kearl, a 49-year-old anesthesiologist who has invested in real estate and other businesses. Joseph Winchell, a former Business Exchange executive, is now president of BX International.

Firm Breaks Even

A pilot and a marathon runner, Kearl may have to go a long way to turn around the barter business. He conceded that BX International only breaks even now and said he expects to plow in more money to make it succeed.

McConnell, who is described as a public relations whiz, started the barter company with profits he made from putting neon signs on the back of taxi cabs. It is unclear what effect his departure will have on the barter industry, but it certainly marks the end of an era.

“He’s kind of the grandfather of the business,” said Terry Neal, a former Business Exchange vice president who is now president of Itex Barter Systems, a competitor based in Portland, Ore.

In barter businesses like the one McConnell founded, members buy goods and services from one another and pay for them with barter checks, which are drawn on accounts of barter credits maintained by the exchange’s computer.

For example, a stationery store might sell paper and pens for barter credits, which its owner might then use to pay a participating accountant for tax services. The accountant might turn around and use the credits to pay his dentist. In most cases scrip from one exchange is not good at another.

But barter scrip is worth less than cash. In the case of BX International, the credits are worth about 40 to 60 cents each.

300 Such Exchanges

There are at least 300 barter trade exchanges in the United States, and Robert Meyer, publisher of the quarterly Barter News, said the industry does $250 million to $500 million a year in business, excluding barter conducted by companies outside trade networks.

In effect, these trade exchanges allow participants to charge different prices to different customers, thus helping them capture additional sales. The practice is common in the airline industry, which has long offered selected discounts to fill empty seats.

But even barter proponents acknowledge that the system is not much good to thriving businesses operating at full capacity, or to those with extremely small profit margins.

The exchanges themselves make money from fees. BX International charges a 10% cash fee on all transactions. Participating businesses pay several hundred dollars to join, plus a small annual membership charge.

BX scrip is really private money but it is also prey to many of the hazards of real money. For example, the company running a trade exchange might start adding scrip to the system, in effect devaluing the “currency” to make purchases for itself, but at the same time risking a kind of runaway inflation in its closed-trade universe.

Industry Loses Steam

The entire industry has flagged in recent years, partly because unscrupulous trade club operators have tarnished its reputation. Many barter members found that the scrip did not hold its value, or that it was hard to spend for worthwhile services. Even McConnell’s barter operation suffered from a 20% membership turnover each year.

McConnell is wary about making claims for his reorganized company’s stock, but he does say that its net worth does not reflect its true value.

Over the years, for example, Business Exchange acquired diamonds, sapphires, emeralds and other gems for about $100,000 worth of its BX scrip, and $100,000 is the value at which the stones are carried on the company’s books. But McConnell says those gems are now appraised at “well over $1 million” in real dollars.

But Business Exchange’s future now rests in its real estate holdings. Its biggest asset is its Pomona condo project. McConnell said 10 model units are finished and 52 more are virtually complete. In all, 296 units are planned, McConnell said, with an average selling price of $80,000. If all goes well the project could produce a profit of $2 million to $3 million.

Started in May, 1984

The project began in May, 1984, and McConnell says contracting and design problems slowed construction. But Business Exchange was able to get another contractor to take over, and McConnell says that, thanks to low-cost bond financing, the units will be available for a 5% down payment with a 30-year mortgage at 8.5% interest.

Now that the Southern California condo market has recovered somewhat, the company hopes to finish and sell all units within two years.

McConnell has had problems in real estate before. One venture that ended badly was in Duarte, where the company spent $566,000 on commissions to line up low-cost bond financing for buyers of a planned residential project in that community.

Unfortunately, the land McConnell wanted turned out not to be available, and, since the financing was restricted to Duarte, the company’s entire investment was lost. BUSINESS EXCHANGE, INC. AT A GLANCE Until recently, Business Exchange ran a barter system enabling participating businesses to trade goods and services. It recently sold the sagging barter business to concentrate on real estate ventures. Still based in North Hollywood, the barter business employs 25 and is privately held.