Question

Petersen, one of your cli-ents, has indicated that Jacobsen is interested in buying Petersen’s interest in the partnership.Relevant information:Information regarding partners: . . . . . . .Partner . . . . . . . . . . . . . . . . . . . . . . . . .JacobsenPetersenOlsenPartner’s capital balance . . . . . . . . . . .$150,000$100,000$50,000Partner’s profit and loss percentage. . .30%50%20%Information regarding net asset values:Account title . . . . . . . . . . . . . . . . . . . . . Note Payable Net Receivables Net Patents Net EquipmentBook value . . . . . . . . . . . . . . . . . . . . . .$130,000$ 90,000$50,000$300,000Market value . . . . . . . . . . . . . . . . . . . .145,00084,00030,000350,000Petersen has asked you a number of questions regarding selling his interest in the partner-ship. It is important to note that the partners vote on partnership matters in the same propor-tion as their profit and loss percentages.Prepare a response to each of the following questions:1. Given the above information, what is the suggested value of Petersen’s interest in thepartnership?2. Petersen believes that there is significant additional value traceable to the partnership that isnot reflected in the above information. In particular, Petersen believes that the partnershiphas significant goodwill and feels that his interest in the partnership is worth $130,000.What amount of total entity goodwill is suggested by this value?3. If Petersen were to sell half of his interest in the partnership to Jacobsen and half to Olsen,why might the value of the two halves not be the same?4. If Petersen were to sell one-half of his interest to the partnership for $60,000, what wouldhis new capital balance be after the sale? Assume that all previously recognized net assets arerecorded at their market values but that only the goodwill traceable to Petersen’s partial saleof an interest is recognized.5. What might be some advantages to Petersen and Jacobsen of the partnership acquiring Peter-sen’s interest rather than selling to an individual?

Answer 1

Answer :

(1)       The note payable has a market value greater than the book value that will reduce the net asset value of the partnership by $15,000. However, the assets whose market values differ from their book values will result in a $24,000 increase in the net asset value of the partnership. The total net increase in the value is $9,000 ($24,000 less $15,000). Petersen’s interest in this net increase is $4,500 (50% × $9,000), resulting in a suggested value for his interest in the partnership of $104,500.

(2)       If the value of Petersen’s interest before consideration of goodwill is $104,500 as set forth above, then the difference between $130,000 and $104,500, or $25,500, represents Petersen’s 50% interest in the value of goodwill. Therefore, the suggested value of goodwill is $51,000.

(3)       Both Jacobsen and Olsen would be acquiring equal interests in the net asset values associated with Petersen’s interest; therefore, one would expect them to value these assets at equal amounts. The critical factor relates to the voting interests acquired by each of the remaining partners. If Jacobsen were to acquire half of Petersen’s interest along with half of his voting rights, then Jacobsen would have a controlling voting interest in the partnership. This may result in Jacobsen being motivated to pay more for her one-half than Olsen would be willing to pay. All things being equal, having a controlling interest represents a “control premium,” which is typically reflected in transaction prices.

(4)       Based on the $104,500 value in item (1) above, a half interest in that would be $52,250. Therefore, selling a half interest for $60,000 suggests that $7,750 represents Petersen’s 25% (one-half of a total 50% interest) interest in goodwill with an imputed total goodwill value of $31,000. Prior to sale, Petersen’s capital balance would be increased by $4,500 per item (1) above plus the $7,750 goodwill traceable to the partial sale resulting in a total of $112,250. After the sale for $60,000, Petersen’s capital balance would be reduced to $52,250 ($112,250 less $60,000).

(5)       In either case, Petersen should sell his interest for the same price. However, the ability for him to collect the sales price may be a factor. The partnership itself may have a greater ability to pay the sales price. The partnership may have a greater ability to borrow the necessary funds for the purchase price due to its collateral position and operating cash flows. Obviously, Petersen would be most interested in maximizing the value of his interest and receiving a cash payment in the most timely and secure manner. The ability of a buyer to pay, whether it is the partnership or an individual, is a critical factor to be considered. If the partnership were to acquire Petersen’s interest, then Jacobsen could achieve a controlling interest in the remaining partnership without using her personal funds.