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Andy Brice
Successful Software

Doug Nebeker ("Doug")

Jonathan Matthews
Creator of DeepTrawl, CloudTrawl, and LeapDoc

Nicholas Hebb
BreezeTree Software

Bob Walsh
host, Startup Success Podcast author of The Web Startup Success Guide and Micro-ISV: From Vision To Reality

Patrick McKenzie
Bingo Card Creator

How much would you pay for this software business? (Redux)

[Reposted because some of the content was apparently unacceptable to the moderators - Sorry to those who replied earlier]

- About 1000 customers with 60% renewal rate
- Revenue is comfortable to support 2 or so people in a major North American city that may or may not rhyme with New York City
- No major code updates in the last 2 years
- ~30% annual growth over the last 4 years

I'm thinking 1x revenue is fair.

This friend of mine (me) wants to sell because there is new competition and I don't want to deal with it. I'd rather focus on other stuff.

What other information would you need to know to make a decision? I don't really want to give details on the actual software because I have a buyer already and just want to get a fair number so I can get it over with.
Costs are basically labour. Servers costs are minimal. If you do nothing, I think it would cost you about $5K to run the operations over the year. Maybe some more for accounting/taxes/etc.

My feeling is that revenue will slow the rate of increase because the competition is relentless and pervasive. They are also well funded and technically very strong. The worst kind of competition for a MicroISV. *However*, it is not direct competition: I have TONS of customers who use both the applications together but TONS of potentials who think that using both is superfluous.

Scott posted earlier: "Stated info is not enough info, only way to even guess is have total access to all books, be clarivoyant, and know what you want it for."

The only "hidden" thing is the above on competition and the only reason this buyer is interested is because I talked to him about the competition and let him know that I am not interested in fighting it. They are. Other than that, the books are straight. I don't think I've taken out more than $60K from the business in any given year.

1x may be low, but I am accounting for the expected decrease in the rate of growth, if not outright reversal.
Bring back anon Send private email
Sunday, February 17, 2013
Could you please give more details regarding the scale of the competitors? e.g. Microsoft/Google scale companies or much smaller ones?
exim Send private email
Sunday, February 17, 2013
The competitors would be akin to something like Thoughtworks, but just getting started in the product space.

I believe it is a 30 year old software consulting company.
Bring back anon Send private email
Sunday, February 17, 2013
The 1x thing doesn't sound unreasonable. Could start with 2x in negotiation and be willing to settle for 1x.

Obviously a smart buyer would want to spruce it up himself a bit and be capable of doing so.
Scott Send private email
Sunday, February 17, 2013
Thanks guys. Good to know I'm in the right ballpark.
Bring back anon Send private email
Sunday, February 17, 2013
I don't understand it. The business is growing 30% annually, has no need of updates, requires about  5k spent to earn about 120k and you want to sell it for about 120k? If you have lost interest, then just milk that cow until its plain dead, might take a few years and earn 300k or 500k still...

Or... find a good partner and share the revenue while he is responsible for supporting the application.

If you really want to sell, don't go for anything less than 3 times revenues, or else it's better to just spend the 5K annually and leave the product earning you money.
Mauricio Macedo Send private email
Monday, February 18, 2013
I lied about $60K, it's much more than that.

Anyway, your point is well-taken. However, I've been doing this for about 2 years already and now I've noticed the (small) but discernible slowdown. I don't want it to die but I also don't want to bother with the actual work of it.

You did give me an idea though: I could let him buy in and give him responsibility for bringing it up to scratch so I could still benefit later on.

Anyone done this before? How would you do this?
Bring back anon Send private email
Monday, February 18, 2013
You're talking about a partnership or a revenue share agreement. Either way you must talk to a lawyer. You can create a new company where you have 60% and he has 40% (never never never split ownership in half!) and transfer the product/IP to the company. Then you have a revenue share agreement where he takes home 40% of the revenue for keeping the company running.

Or you give him a license to the source code whilst keeping the website (salesfront) under your control, and he earns a % of each license sold and answers the support@ e-mail.

Either way thing can work beautifully or crash horrendously depending upon the parties envolved.  I suggest you read Founders at Work: Stories of Startups' Early Days to be aware of pitfalls and advice

Mauricio Macedo Send private email
Monday, February 18, 2013
I work at a consulting company and we had other company contact us because they had a software to sell and they didn't want to keep supporting it. So we took the support/development/customization for a fixed amount per month while they continued to sell the product. Worked well for both of the companies. You could look into that option too.
Mauricio Macedo Send private email
Monday, February 18, 2013
Well now I'm full of ideas. You guys rock.
Bring back anon Send private email
Monday, February 18, 2013
You really have to get a good lawyer or consultant who has done that before before going in with partnership. It's hard, but not impossible to come up with a fair deal according to your wishful thinking about how things will work under best circumstances. I have never seen those circumstances. An outright sale is far less risky because of this.

What happens if he has 51%. Can he issue more stock and sell it, with proceeds only going to himself?

What happens if you sell him 40% and in a couple months he loses interest and starts some other project, and then you have a buyer that wants to pay you good money for it, but can't. Do you now take over maintenance and he gets 40% of profits forever, while doing nothing?

Contract has to address an infinite number of scenarios. All unlikely, but the cumulative likelihood of SOME bad scenario happening is 100%.
Scott Send private email
Monday, February 18, 2013
I've done a minor partnership-like thing before where he "bought into" the business by doing specific tasks that we'd agree on before hand.

So if he loses interest, he only has as much equity as he has worked for.

But yeah, there are a billion ways for it to go wrong :-/
Bring back anon Send private email
Monday, February 18, 2013
1-3x is the rough range for this.  Sticking around as a long term partial owner can be really tricky. You could try something like asking for 3x with the payments spread over 5 years. You would then run the risk of the company collapsing and not getting future payments. Or you could agree to sell him 20% of the company/year as some fixed metric (3x sales for example) so you can gain or lose depending on how the company goes.

It should be noted that selling (and partial selling)  has a bunch of tax issues. You might make more money selling for 1 million than you would by getting 1.3 of revenue.
Foobar Send private email
Friday, March 01, 2013

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