Quote:
Originally Posted by Hero Protagonist
I've been offered a % share of a business as an incentive to stick around, and I have a few questions about the value of the share. It's an aviation business split into an asset holding company and a operating company.
The CEO owns the aircraft and other productive assets under a Holding Company (HC) that leases the aircraft to the Operating Company (OC). HC does not make a significant profit or loss, and owns 2MM worth of assets (aircraft) which are necessary to the function of OC.
Assume that OC has cash flows/discount rate that give it a net present value of 2.5MM, and that OC has no assets.
I will be getting a % share in OC as an incentive deal to stick around. Am I right in thinking that since the entire business (HC+OC) is worth 2.5MM based on cash flows, and HC owns 2MM in assets, that implies that OC is worth 500k?
Just a follow up here. The CEO has changed the deal so that I will be given a smaller percentage of both the Holding Company (HC) and the Operating Company (OC). This will be simpler to value and simpler going forward if anything changes with the structure of the business.
The HC doesn't have any equity though looking at their balance sheet. They owe lots on the aircraft, and the business owes a few hundred grand to the CEO. In reality the aircraft won't have depreciated as much as they have on paper, so maybe there is 100k worth of equity there. Cash flows are basically break-even for the Holding Company. They are paying 7% on the aircraft if that is relevant.
The OC cash flow is alright but overheads (wages mostly) keep going way up. Under normal operation cash flow would be 50k-200k (it was 120k in last 12 months, less in prior periods).
The local industry has recently been shafted by a regulator, adding a lot of additional costs and giving the power to a competitor to put us out of business. This will involve an expensive legal fight which will be a pain in the ass, and even if it is successful there is no guarantee that the business will be trading after 2021 when concessions are renewed.
A couple questions:
-If the Holding Company has 2MM in assets but no equity, zero cash flow, is it it worth anything? It gets enough income to pay for financing, maintenance and build equity in the aircraft.
-How to discount the future cash flows of a business that has huge risk of folding shop?
-Is there much chance this business is worth more than zero?