Trading Services for an Equity Stake
Nowadays companies have to look at unique financing arrangements as commercial enterprise finance is tight and markets fickle. Have you thought about bringing on an equity partner not for the cash they can provide but the expertise and services they can provide? Sometimes a company needs a certain service more than it needs cash, particularly if it is from a company that is highly sought after for their area of expertise. When things are tight and options limited, you may want to expand your funding search for service providers who could be integral to your company success and present them with an equity position verses paying cash for their services. In my role as Turnaround Consultant I see this as a viable funding option for businesses in this recession and even in less turbulent times.
It Isn’t Barter
In some sense this appears as barter, but it is really an equity deal as the service provider receives an equity position for the service they provide. For this to work, there needs to be incentives built in so the service provider has a real stake in the success of their services, and the receiving company can rest assured they will be a priority to the service company. What a better way for a start up to secure high end services with out having to outlay precious and limited cash. This type of funding arrangement can work really well with Business Turnaround Services.
The Valuation can be Tricky
In this scenario, the valuation of a company can be very tricky in trying to establish the amount of equity to provide for the exchange of services. However, it can and has been done. Use comparable sale and operational revenue as indicators of value. Plug in the costs of the services to be provided. You can generally get in the ballpark for what would be a fair trade.
Marketing and Advertising for an Equity Stake
Marketing and Advertising can be the mainstay of a company’s success so trading equity for these type of expert providers can be very worthwhile. Make sure you have incentives built into the equity share arrangement so the service provider / equity partner has plenty of reason to work hard on your account. For instance, if they meet certain degree of sales or amplification in sales due to their services, then the equity stake can grow to a predetermined cap. It can be a real win-win for both companies in this uncertain economic time. Consider a re-look at your Business Plans to see if trading equity for valuable services makes sense for your business.
This article is written by Frank Goley, Business Turnaround Consultant for ABC Business Consulting.