SA Business Split - Value of Divided Company Assets?

[Jurie]

I have decided to resign from a small company which I was a 50% partner and work independently.

All costs and work in the company has been done and earned on an equal split. In the course of the business, we purchased a commercial software and upgraded with a maintenance agreement .

The original purchase costs were about $35,000.
The accountants depreciated the purchase costs for tax reasons and the book value is now below $10,000 dollars.
The identical software now costs $50,000.

What value do we put on the software under commercial law? Both of us want to continue using the software after the split.

 

[Sarah J]

A partnership is not a separate legal entity, which means, in a windup and division of a partnership, you do not "buy" from the partnership. Rather, you share in the costs and assets. Basically, it should be whatever the two partners decide.

If you both wish to continue using it, would you be sharing the licensing? Are there any on-going licensing fees? If so, you will be sharing in the costs. Will the software allow both persons to use it at the same time or will one partner "buy" it off the other? If you're both using it at the same time, will each or both of the partners wish to use it in a company/partnership capacity where they will be allowing multiple users to share the program?

Essentially, are you asking the valuation from an "acquiring the software" perspective or from a "on-going sharing" perspective? If it is the latter, why you are asking for a valuation unless there are future costs (e.g. licensing fees) concerned?

 

[Jurie]

A partnership is not a separate legal entity, which means, in a windup and division of a partnership, you do not "buy" from the partnership. Rather, you share in the costs and assets. Basically, it should be whatever the two partners decide.

If you both wish to continue using it, would you be sharing the licensing? Are there any on-going licensing fees? If so, you will be sharing in the costs. Will the software allow both persons to use it at the same time or will one partner "buy" it off the other? If you're both using it at the same time, will each or both of the partners wish to use it in a company/partnership capacity where they will be allowing multiple users to share the program?

Essentially, are you asking the valuation from an "acquuiring the software" perspective or from a "on-going sharing" perspective? If it is the latter, why you are asking for a valuation unless there are future costs (e.g. licensing fees) concerned?

I am asking from an "acquiring the software" perspective as the software can only be licensed to a single machine. We cannot share the software as we will be in different States, Partner wants to keep the software in the business and pay me for my share at half of the current depreciated book value of less than $10,000.

In that case I would need to buy a new licence for about $50,000.

Question is, what is the value of the software when one partners buys out the others share? Is it the depreciated cost, the original purchase cost or the current cost?

Future licensing fees and costs are in the future and do not need to be in this calculation.

 

[Sarah J]

Hi Jurie,

At the end of the day, it is what is agreed between the two partners. Generally, it would be the market rate and not the original cost or the depreciated cost as calculated by the accountant. This is because the product may have appreciated since original purchase and the accountant's calculations may not be the most objective and may be accounting to accounting principles rather than real market value. However, you will need to find the market rate for the same type and model of software (i.e. it would not be comparable if you're comparing the cost of a 2014 model with a 2009 model).

 

[Jurie]

Hi Jurie,

At the end of the day, it is what is agreed between the two partners. Generally, it would be the market rate and not the original cost or the depreciated cost as calculated by the accountant. This is because the product may have appreciated since original purchase and the accountant's calculations may not be the most objective and may be accounting to accounting principles rather than real market value. However, you will need to find the market rate for the same type and model of software (i.e. it would not be comparable if you're comparing the cost of a 2014 model with a 2009 model).

Hi Sarah
The software is continuously being upgraded so what we have is exactly what is being sold today so that sets the price. There is only one model and that is the latest release.
Thanks for your advice.

Jurie

 

[DennisD]

So the partnership paid for a licence to the software, a perpetual one or only for a couple/few years? And it also paid for the maintenance agreement which is still current (until when?), so the partnership for now has the latest version of the software

What's the software worth? Not sure. You can agree whatever you'd like. It's important when those agreements expire, because if there's limited time left for the partnership to use the software before making further payments to renew, that'll affect the value of the remaining benefit to the partnership under those agreements

 

[Rod]

1 option, assuming the license agreement allows it, is to sell the software and split the sale price 50/50.

You can tell your partner you'll keep the software and pay the book value to your partner and see how well that suggestion floats. If there's an immediate 'no way' response, you'll know the deal is not fair