The Underlying Financial and Legal Framework for PPE Transactions

Consulting: A diagnostic, problem-solving process

After managing hundreds of engagements, we’ve put together some guidelines that can help save time and provide for a more productive and successful process.

All transactions require a qualified buyer that has a legal-basis to successfully transact.
That means that the party submitting the ICPO, the Buyer-of-Record (the “Buyer” or “BOR” or “Party A”) earned the funds used to purchase the goods or has authority to use someone else’s funds.

If Party A didn’t earn the funds used to purchase the goods, then Party A must demonstrate that they are duly and legally-authorization to use funds from a Funder (the “Funder” or “Party B”).

What’s a Legal Basis for a Successful PPE Transaction?

Contractual “written” authorization to Party A from Party B that Party A is authorized to use Party B’s funds and that Party B’s funds are to be deployed for a specific transaction. Once Party A enters into a transaction, this binds Party B to the transaction, as long as the seller (the “Supplier” or the “Titleholder” or the “Seller” or “Party C”) has met their obligations.

Types of Binding Relationships between Buyer and Funder

JV (or “Joint Venture): Contractual basis that defines the obligations of each party. Supplying the contractual agreement may be required. A very specific letter of attestation might be sufficient to demonstrate the authority and capacity of the funding partner. A Board Resolution Letter, signed by a principal, from the funding partner, confirming that they are deploying funds for the transaction may be required.

What doesn’t work? A) A verbal statement of a joint-venture, B) A joint-venture agreement or attestation that does not specify the deployment of funds or C) A joint venture with a company that doesn’t have the funds, ergo “They have their own funder”.

What if I have a line of Credit? If it’s from a fund or non-financial institution, then a Board resolution letter may be required. If it’s from a bank, a confirmation from a banker and documentation confirming the terms of the line of credit may be required.

PAL (or “Procurement Authorization Letter) from an Exit Buyer: Authorization to exclusively, on behalf of a qualified buyer, identify and negotiate, and use funds to purchase goods.

When the procurer or “proxy” is purchasing at one price and then selling to the exit buyer at a higher price, using the exit buyer’s funds, this is considered an “arbitrage”. An arbitrage is common in many industries where the profit is derived by a “middle man” who takes advantage of a sales market price and an exit buyer’s purchasing price. While accepted in many markets, this is not always accepted in PPE. Some sellers may consider this an adverse risk that one party is artificially increasing the price of a good that is subject to extreme market demands during a global crisis (price gouging). In addition, some sellers may not wish to incur risk that the funds are not deployed in a timely manner from the Exit Buyer, to the Buyer of Record, to the Seller. In this case, the seller may request that the Exit buyer be brought forward to transact directly.

What will Never Work: Aggregating Buyers

A) Purchasing a large lot and aggregating the funds from multiple exit buyers whose collective purchases add up to the total amount of the purchase? Why won’t it work? Because it’s virtually impossible to guarantee that each and every exit buyer will fund, in time to purchase the goods and that the flow of funds will meet the seller’s tolerance for risk. B) An exit buyer who ALSO has a funder.

Procuring for Government or Hospital Exit Buyers

Institutional buyers like Government or Hospital buyers don’t offer proof of funds. However, since they are easily verified and commercially-viable organizations, their contractual engagement with a procuring company may be “good enough” to substantiate a legal-basis for them to transact.

What’s required? A verifiable contract with the purchasing entity that will pay for the goods. This contract might be a “award letter” or a “purchase order” or a specific procurement authorization. A principal or contract-managing officer can verify the authenticity of the contract.

What will Never Work: Buying for a “Friend” who Really Holds the Contract

A) A company that is procuring for yet-another company that actually hold’s the contract with the entity that will pay for the goods. This is a “double-proxy” and it is almost never accepted. B) A company “Buyer” that states that they are not authorized to disclose the contract or unwilling to disclose the contract or unwilling to permit verification of the contract.

Key Terminology

BUYER. Buyer of Record (or “BOR”) or “Buyer” is the entity that submits the ICPO. This is the entity who will sign the SPA and take title to the product. If this entity is submitting an ICPO and another company will sign the SPA and Take Title, they will be required to bring this party forward. The same company that submits an ICPO, must sign the SPA

AUTHORITY. Authority is a legal, contractual, thus “written”, non-verbal basis that authorizes Buying entity (A) to use Funding entity (B’s) funds. It is provable and verifiable. It is authorized by a principal at the Funding entity.

FUNDER. This is the party who has earned the funds at the time the the ICPO has been submitted. This party intends to pay for the goods or fund the buyer’s escrow. This might be a capital partner such as a financier, or a JV partner – investor, OR it could be an Exit Buyer such as another private company that the BOR is reselling to OR it could be a United Stated Government Entity or Hospital Group, e.g. Healthcare Systems, GPO’s (Group Purchasing Organizations) or Healthcare Buying COOPS.

The Buyer and the Funder MAY be the same entity

STATUS OF FUNDS. What financial institution does the funder hold the funds for this transaction? Are the funds liquid, unencumbered, free and clear to transact? Are they reserved for this transaction? Are they a line of credit? Are they syndicated (from multiple accounts)? Are they on-ledger? Note: off ledger funds are infrequently used.

Based on the Above Framework:

  • Who is the Buyer (BOR)?
  • Who is the Funder (Who Earned the Funds)?
  • What is the legal-basis (contractual) between BOR and Funder?
  • What documents can be provided demonstrate funding capacity?
  • What documents can be provided to demonstrate authority?
  • What is the current status of the funds, right now?
  • What triggers are required to prove funds or move funds?

Mothership's market information is for informational purposes only. This information represents an understanding of product availability, pricing, and procedures to the best of our knowledge. However, the Mothership does not warrant the content's accuracy, guarantee that the information is free of errors, nor do we physically verify or confirm the product's existence or availability. The marketplace for medical products is continuously evolving and volatile due to supply-chain obstacles and the global COVID-19 pandemic.

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