The time may have come for your company to sell off a line of books or videos, a journal, training division or bindery that no longer contributes to the core purpose of the company and may be pulling on resources that you need for other projects. But how do you value and then sell off part of your company to another group or corporation?

It may not be as difficult as you think.

When we begin talking about spinning off lines or divisions there are hundreds of possibilities and no one article could address them all, but we will take two different scenarios, and by example, breach the subject.

Lets say that you are a producer and marketer of special interest video tapes and you have approximately 200 videos on various subjects that you either produced or co-produced and are marketing. You want to divest a 45 tape series on travel to Europe and Asia that you have been successfully marketing for 6 years. How do you do it?

First of all you must face the fact that no one wants to purchase dead inventory or slow selling products that they cannot move. Therefore these 45 tapes must have some "Going Concern Value" that another company can rely on. Do not try to fool yourself by saying, "Well if only I had had the money to promote this line and do a better job of packaging, it would have really taken off". The division or series that you are spinning off has to have proven market appeal to be sellable. If it does. The next step is to show that track record to the buyers.

Start by putting together a profit and loss statement

on each video tape in the series. That is, you need to determine the exact sales of each tape, by year, and a production cost assigned to each project. This should give you a gross profit on each tape which you can sum into an aggregate gross profit for the series. You may have to delete a few or many of the tapes that have never sold well and are a drain on the series. For our example let's say that you deleted 8 videos from the series as your "dog tapes" and have a core group of 37 tapes that make money. From the aggregate gross profit on these 37 tapes you will want to subtract a cost for marketing (often up to 25%) and a cost of your company's overhead (because these productions were not made in a vacuum). The result is a net profit on the series that you can present to the buyer.

If the series has not been completed and there will be new productions and new markets available to the buyer -- you will need to do some projections on sales and net profit for the coming years.

If this series of 37 tapes is generating $500,000 in revenue a year with a gross profit of $200,000 (40%), we subtract another $100,000 for marketing and overhead, resulting in a net profit to the company of $100,000 a year. Add an inventory of $25,000 at cost -- What can you sell this series for?

This is considered a medium to high risk investment for a company to make and the smart buyer will not pay you a great deal up front for the series. Usually no more that one to two year's net profit. Because of the risk perceived in purchasing even excellent productions you can expect no more than a 3 or 4 multiple on net income (plus the inventory at cost), or $325,000 to $425,000 total for the series. The terms will probably include 20% to 50% cash up front, a royalty on future sales for 3 to 7 years and an agreement to buy new productions in the series on a cost-plus-royalty basis.

You have a large printing company and own a publication and book design division not located in your plant that you want to sell. This division is still viable and makes money, but you lost your general manager of 10 years and your own company is moving away from book and publication printing work. What do you do?

Hopefully you have maintained this division as a wholly owned subsidiary and not commingled its income and expenses with that of your parent company. If you have, you must go back at least 5 years and recreate new P & L statements for this division -- satisfactory to a big eight accounting company's review.

The next step will be to identify the percentage business that this division does with the parent company and arrange a contractual agreement between the division and the parent so that the new owners can have some assurance of a continued work flow. The valuation of the company can proceed using standard methods of determining the recast cash flow of the business and creating a multiple of that cash flow. Acquiring stand alone divisions from a parent company can be seen as both risky and as not risky depending upon the strings attached between the parent company and the division being sold.

If our Design Division is doing $2,000,000 in revenue and $500,000 is being done with the selling parent, you may have to discount the value of the company based on the potential loss of revenue when the buyer takes over the division and the parent company's work load can no longer be counted on. If the division has a net profit of $170,000 after management salaries and all expenses, plus a net worth of $250,000, you should be able to sell this division for $750,000 to $1,100,000 - depending on its perceived stability of future earnings.

Selling a division or spinning off a line is substantially no different than selling any company and potentially less painful. Success lies in packaging up the division as a stand alone business and presenting the opportunity to the right people. Usually these kinds of acquisitions are never even advertised. They result from business arrangements between friendly competitors, partners, management and employees and friends. Just because you know the buyer well that does not mean that you should ever short cut the process and dispense with arms length negotiations. Some of biggest law suites happen between friends and friendly companies when one group relies on promises of continued patronage from the selling company that never materialize and each dispenses with proper due diligence and arms length negotiations.

There may be hundreds of thousands of dollars in needed capital tied up in underperforming assets that your company no longer utilize to their maximum potential. This may be the time to shed those businesses, lines, divisions or units that no longer serve a vital function to your core business. If you no longer serve a particular market or have the marketing muscle to stay in a market -- sell that asset and concentrate on your primary business!