Expert: Eric Hofer - 10/12/2008

Question
We are starting a beverage company and want to enlist distributors. In order to enhance the distributors positions we want to offer them equity contracts in the event of the sale of the company or if we decide to take distribution in a different direction. I would like to offer them a per case payout based on annual volume. What would be a fair amount per case?

Answer
Sharing any sort of equity involves considering several items, e.g. the amount of risk, duration of such a risk, amount (money, service, etc.) invested vs the other partners; opportunity cost, etc.

There's insufficient information with which to give you an idea of what that percentage / amount might be; that is considered fair.  

However, on buy outs there are some rules of thumb - though I'm not the one to answer as an expert.  One that I've seen is for on-going sales the value is 7 times 1st year of earnings.  In this case, if you figure that they made say 4 cents per case, then the value of the share would be 28.  Again, though I caveat this with what I said earlier - there's no indication of how much they actually invested; nor are there safeguards against "trade loading" used to get volume up in year 1 for a later buy-back.

If the volume in sales offered saves you significantly say in marketing, staffing, etc., then the percentage you'd offer should be higher.  If on the other hand, all they're doing is offering you capital for 1 year of sales - then why would you pay more than say 2 or 3 times the cost of capital?