Spin-Off or Startup: What’s it worth?
I manage a company which has been in business for ten years. Our parent company owns similar businesses in other major cities in the country. Unfortunately, they have decided to pursue other opportunities and are closing down all of our local businesses. The equipment leases are tied to the parent company and we will need to negotiate our own acquisitions without their economy of scales. Presently, I have 15 employees, 7 of which are sales positions and we have annual revenues of 5.5 million. Local competition requires us to act swiftly to preserve our client base and we are conservatively estimating first year revenues to be just over 2 million with the belief that we will regain our lost revenue in 3-4 years.
A similar sized competitor in another city is interested in expanding and would like to join forces with us. They have the necessary credit to obtain all of the equipment and supplies we need as well as the operating capital to finance the operation to profitability. I believe that making this partnership will allow us to maintain more of our current revenue as well as expedite the recovery of lost revenue. Our problem is trying to determine a fair equity structure for this partnership.
I will be providing the management (for a salary), key personnel and client relationships; they will be providing the physical space, equipment and customized accounting software. How do you determine a fair value for these contributions?