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Evaluating value of software


2006-02-16 07:10:42 AM
delphi165
Hi,
I would like to ask if anyone has any idea about how to evaluate the value
of a software, due to partnership questions.
The following is my scenario:
In (or around) mid 2003 I started a software project that targets the 'Field
Service Management' industry, the software was spec'd out and intinally
coded for the first 2 years, its comprised of the following: Its a full
fledged 3 tier applicaction written using RemObjects DataAbstract and could
use multiple DBMS as its data store, it could have handle multiple company
files, multiple company branches etc. The UI is tottaly sepperate for the
bussiness logic. It has a built in Automatic Update feature for the clients.
It UI is desgined using mostly comprised with all of DevExpress's
components.
After the initinal 2 years I gave it to 4 companies who started to use\test
it, of course there was bugs at the beginning and needless to say there
where features missing, however after a year of testing and polishing the
clients using it (over multiple locations worldwide) are extremly satisfied
with the outcome, its now 'mostly ready' to go to the market, But we havn't
started to do any marketing yet in order we should be able to predict that a
ussual anual return would be any figure, so currently I am unable to predict
anything on the number of sales.
The numbers are just figorus and not actually numbers, but to give an idea.
Say the current expense to run the company is a total 110k a year (of course
this will grow overtime).
The average sale amount is predicted to be around 7k.
So my question:
1. How would anyone evaluate such figures to get an idea of the 'current'
value of the company?
2. How would anyone evaluate the value it was after the 2 years when the
project was 'sent to beta testing'?
Any input would be greatly appreciated.
Best Regards,
Tom Klien
 
 

Re:Evaluating value of software

Tom Klien writes:
Quote
1. How would anyone evaluate such figures to get an idea of the 'current'
value of the company?
Market research - likelihood to buy questionnaires via
phone/mail to enough potential decisionmakers for a
decent sample & to get a rough percentage at 7K
(remembering that intent-to-buy is usually full of positive
bias, so reduce percentage accordingly).
JoeH
 

Re:Evaluating value of software

Quote
1. How would anyone evaluate such figures to get an idea of the 'current'
value of the company?
Frankly the value of most companies, unless they are well established with a
brand is 1 years revenue. And since you have no revenue estimate, you can't
give it a value. To my mind, the current value of the company is near zero
as it is mostly expenses and no revenue. If you were optimistic, you could
say that your revenue will exceed your expenses, and at $7K a pop one would
hope so, so lets say 50% more than expenses, or $160K, giving your firm a
value of $160K-$480K. This is total fiction of course.
An alternative valuation of the firm is the amount of money sunk into
expenses, as it at least reflects the historical cost.
You might want to read
www.joelonsoftware.com/articles/Camelsand{*word*221}Duckies.html for
another view of the whole thing.
Oliver Townshend
 

Re:Evaluating value of software

Oliver,
Quote
To my mind, the current value of the company is near zero as it is mostly
expenses and no revenue.
True, but I guess if I'd like to give up my partnership nobody would say
that its worth nothing, since it *could* at the same time later on produce
lots of revenue which is tottaly based on the current value, so if one
partner wants to sell his partnership, how would one determine the value
based on the circumstanses?
Thanks for your time.
Tom
 

Re:Evaluating value of software

"Tom Klien" <XXXX@XXXXX.COM>writes
Quote

True, but I guess if I'd like to give up my partnership nobody would
say that its worth nothing, since it *could* at the same time later on
produce lots of revenue which is tottaly based on the current value, so if
one partner wants to sell his partnership, how would one determine the
value based on the circumstanses?
Ultimately it is a question of what you and your partner(s) can agree upon,
especially if you haven't made any arrangements in advance for this
situation.
Chances that it produces "lots of revenue" are probably a lot lower than you
think and much work is still left to be done.
Regards
Uffe
 

Re:Evaluating value of software

Quote
True, but I guess if I'd like to give up my partnership nobody would
say that its worth nothing, since it *could* at the same time later on
produce lots of revenue which is tottaly based on the current value, so if
one partner wants to sell his partnership, how would one determine the
value based on the circumstanses?
These sort of questions made people a lot of money in the web boom, but I
still think that until you can predict your revenue there's no answer.
I'd say you'd want half of your costs back, plus a cut of the action if it
was successful (eg 5-10% share of the upside). The only reasonable out of
this would be to agree that your partner can nominate a price that they will
buy the system from you, but that you have the option to instead buy the
system from him at that price. You partner can not afford to pitch too low or
you'll buy it.
But my opinion - you're in a partnership and you're stuck in it, and until
there some proof of the pudding, you will never be entitled to a cent (unless
you can sell the whole business to a rich outside partner).
Oliver Townshend
 

Re:Evaluating value of software

Oliver,
Quote
But my opinion - you're in a partnership and you're stuck in it, and until
there some proof of the pudding, you will never be entitled to a cent
(unless you can sell the whole business to a rich outside partner).
Thanks for your comments and input, the situation here is that the partner
(investor) is in breach of the agreement that we have and according to the
agreement if he stops with payments (he can not afford it) we have to check
the value of the company when he stopped paying and this value I have to pay
him back when 'when the bussiness is profitable'.
So this is my situation, which should clear things up, so if anyone could
come up with a good way to evaluate value I'd appreciate that.
Thanks in avance
Tom
 

Re:Evaluating value of software

Uffe,
Thanks for your comments and input, I'd appreciate if you could see my
reply to Oliver, and reply accordingly.
Thanks in advance
Tom
"Uffe Kousgaard" <look_at_www.routeware.dk>writes
Quote
"Tom Klien" <XXXX@XXXXX.COM>writes
news:43f3f1b6$XXXX@XXXXX.COM...
>
>True, but I guess if I'd like to give up my partnership nobody would
>say that its worth nothing, since it *could* at the same time later on
>produce lots of revenue which is tottaly based on the current value, so
>if one partner wants to sell his partnership, how would one determine the
>value based on the circumstanses?

Ultimately it is a question of what you and your partner(s) can agree
upon, especially if you haven't made any arrangements in advance for this
situation.

Chances that it produces "lots of revenue" are probably a lot lower than
you think and much work is still left to be done.

Regards
Uffe


 

Re:Evaluating value of software

Zoran,
Thanks for your input!
Quote
That's exactly what you should do. Value of the company is nearly $0 at
this moment and that is what you should pay them.
True, but lets say if I'd approach you and ask you for how much *you (a
programmer)* would be willing to buy (invest) in such a software you would
of course not say that its worth $0 !, and depending on your answer to that
question this is the value of the software, and this I belive will be the
way I will be forced to pay him, so my question is not based on theory whats
it worth, but rather how much would a programmer that is willing to make an
investment how much would they risk and be willing to pay to buyout the
partner.
Please note, that I am not trying to do a rip off from the partner, but
rather looking at the real value.
Thanks again
Tom
 

Re:Evaluating value of software

Quote
Thanks for your comments and input, the situation here is that the partner
(investor) is in breach of the agreement that we have and according to the
agreement if he stops with payments (he can not afford it) we have to check
the value of the company when he stopped paying and this value I have to pay
him back when 'when the bussiness is profitable'.

That's exactly what you should do. Value of the company is nearly $0 at
this moment and that is what you should pay them. They gambled and they
lost. Simple as that. If your company made $6,000,000 so far, the investor
will gladly take $5,000,000 (or whatever %) from you without any hesitation.
Maybe to show a good will, I'd give him a little bit more than nearly $0.
I am not a lawer, just my opinion.
--- posted by geoForum on delphi.newswhat.com
 

Re:Evaluating value of software

Quote
True, but lets say if I'd approach you and ask you for how much *you (a
programmer)* would be willing to buy (invest) in such a software you would
of course not say that its worth $0 !, and depending on your answer to that
question this is the value of the software, and this I belive will be the
way I will be forced to pay him, so my question is not based on theory whats
it worth, but rather how much would a programmer that is willing to make an
investment how much would they risk and be willing to pay to buyout the
partner.

Please note, that I am not trying to do a rip off from the partner, but
rather looking at the real value.
Ok, I was thinking of a venture capital deal. If someone is professional
investor than that is what I'd do.
The other story is if the investor is actually a partner/friend who
invested his knowledge and his time to work on a project. In that case I
would reimburse him for the money he put down, as well as for the time he
invested into project. Maybe try to agree on a buyout price for both of
you -- how much would either one pay the other person to buy him out. I
would give him 50% of agreed price right now. The other 50% s/b made IF
and WHEN sales make enough money. I think it is fair for everybody.
--- posted by geoForum on delphi.newswhat.com
 

Re:Evaluating value of software

Zoran,
Very well said, and to be honest I offered him much more then that, he
invested up to now 165k and I offered him 250k! within one month from now I
would have give him 150k and a year from now I'd have give him the
remaining 100k, but he didn't want he insisted of getting the 250k now,
which I don't want.
So I told him that if that is case I will take it to trial, and according to
the agreement if it comes to such a scenario we divide the current value in
half and thats the amount he gets 'when the bussiness is profitable'. But
now I see that the value is much less then the amount I offered him for the
buyout (250k) which means I have nothing to loose if I go to trial, just the
hassle\money of the trial which I initially tried to avoid.
Thank you very much for your effor Zoran, its much appreciated!
If anyone still has a concrete idea on how to measure the value, so I know
for sure that I am not loosing anything by going to trial I'd appreciate
that.
Tom
"Zoran" <XXXX@XXXXX.COM>writes
Quote
>Thanks, the scenario is just slightly diffrent, its a friend who just
>invested money in the idea\project that I am (the programmer) was creating
>and now we have to cancel the partnership due to him not following the
>agreement, but I don't want to rip him of.
>

More clear now. This is what I'd do: I'd pay him back all the
money he invested, plus an interest of, let's say, 15% yearly. This is
much better that if he had money in the bank all this time. I'd make
an arrangement to pay this from the revenues of the software (I suppose
you don't have too much money now).

Then I'd start heavy marketing for the software and put all the
profits of the sales towards the payment to pay him off in the shortest
amount of time.

Of course, this might break the friendship, but look at it in this way:
you did most (if not all) of the work and you deserve big part of the
profits. He did financing and he'll be rewarded with 15% interest (which
he'll never get from the bank). To me it is win-win situation, although
your friend might not think so.



--- posted by geoForum on delphi.newswhat.com
 

Re:Evaluating value of software

Quote
Thanks, the scenario is just slightly diffrent, its a friend who just
invested money in the idea\project that I am (the programmer) was creating
and now we have to cancel the partnership due to him not following the
agreement, but I don't want to rip him of.

More clear now. This is what I'd do: I'd pay him back all the
money he invested, plus an interest of, let's say, 15% yearly. This is
much better that if he had money in the bank all this time. I'd make
an arrangement to pay this from the revenues of the software (I suppose
you don't have too much money now).
Then I'd start heavy marketing for the software and put all the
profits of the sales towards the payment to pay him off in the shortest
amount of time.
Of course, this might break the friendship, but look at it in this way:
you did most (if not all) of the work and you deserve big part of the
profits. He did financing and he'll be rewarded with 15% interest (which
he'll never get from the bank). To me it is win-win situation, although
your friend might not think so.
--- posted by geoForum on delphi.newswhat.com
 

Re:Evaluating value of software

Tom Klien writes:
Quote
So I told him that if that is case I will take it to trial, and
according to the agreement if it comes to such a scenario we divide
the current value in half and thats the amount he gets 'when the
bussiness is profitable'. But now I see that the value is much less
then the amount I offered him for the buyout (250k) which means I
have nothing to loose if I go to trial, just the hassle\money of the
trial which I initially tried to avoid.
You're talking about large enough sums of cash here that I would suggest you get
some advice from your lawyer as well.
 

Re:Evaluating value of software

"Tom Klien" <XXXX@XXXXX.COM>writes:
Quote
Very well said, and to be honest I offered him much more then that, he
invested up to now 165k and I offered him 250k! within one month from now I
would have give him 150k and a year from now I'd have give him the
remaining 100k, but he didn't want he insisted of getting the 250k now,
In fact, at 15% interest, 165 invested for 4 years is nearly 290K. If
he invested 165K and you are only offering him 150K now ( with an
extra hypothetical 100 in the hypothetical future ), I am not
surprised that he refused your offer.
At litigation, the courts usually impose an interest rate of 5% (
varies between countries)
Moral: Never invest in a friend's business.