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Doug Nebeker ("Doug")
I have been selling a piece of business-related desktop software for a couple of years. I've had lots of fun creating it and consider it to be a technical success. User feedback is also great. But the current sales do not allow me to go full-time, and do not grow terribly fast either.
Now I have two options: invest time and money in better marketing, or sell the project. I'm inclined to go the second route, because I feel more like moving on to a new technical challenge than learning how to do proper marketing.
My current plan is to contact established vendors of related software suites that could benefit from including my software as a component. I believe this way my product can earn more money for these companies than earn for me being standalone. I'm ready to transfer them the intellectual property, and the other assets, for a payment.
Now, of course, I am not sure if my product is good enough for them to bother. But I think it's worth a try. And I would like to be prepared if they ask about my terms.
- I think I will have to be the first to name a price. I realize that the price should reflect the value of the software (to the buyer), not any sort of cost. But still I'll have to start somewhere. What about 50% of the cost of developing a similar program from scratch?
- What terms and conditions of the transfer are possible? Should I irrevocably, exclusively and unconditionally transfer all the IP? Or would I benefit more from a more flexible type of agreement?
- What kind of support should I consent to, and under what conditions?
- The buyer will most likely be from a different country than me. How will this affect things from the legal standpoint?
- Any generic advice?
Addressing each of your questions:
- A business is typically sold for some mutually agreeable multiple of annual profits. For most of the one-man business sales that I'm aware of, that multiple has been 1-3. The cost of developing a similar product might be a consideration, but isn't generally part of the formula when you're considering buying or selling a *business*.
- Any terms are possible, as long as you and the buyer agree on them! I imagine that any serious buyer would insist on a complete transfer of the IP, as you said, but if you're looking for something else, it might be possible. This is probably something to be very up-front about with any potential buyer.
- Support agreements will depend largely on how well-equipped the buyer is to take over support. I've seen everything from a complete buyout where the seller walks away and never thinks about the software again, to ones where the seller is hired by the buyer as a full-time employee whose sole responsibility is working on the product. Neither of these scenarios are uncommon, and intermediate scenarios are even more common.
One thing to keep in mind is that the amount of support provided/required could affect the price. If they'll have to hire someone or find a contractor to do support, then that may cause the price to go down. On the other hand, if it's a hire/acquisition scenario, you'll typically get a good buy price AND a salary on top of that. Again, anything is possible.
- I won't pretend to know anything about the legal implications, other than to say that for ANY sale of a business (domestic, international, or even to your own mother), you need to involve an attorney who who knows this kind of law, and will do the contract writing for you.
I hope those notes are helpful. Good luck!
Generic advice: learn how to do proper marketing, or you will find yourself shopping your next technical creation around in a few years.
Dmitry Leskov @Home
Saturday, March 09, 2013
Price: Every potential buyer will have a different strategy, depending on their motivation. Which doesn't mean your price has to change (in fact you may have legal problems asking for different prices), but the way you justify that price will change depending on the buyer. Start at the high end (but below out to lunch numbers) and if you get interest within a set period of time (say 90 days) be prepared to give up 30% of your asking price in negotiations. If there aren't any serious buyers within that period of time, drop your asking price by 20% and be prepared to give up 30% of your new asking price. Business valuations are tricky, and the number of serious buyers is usually quite low, so you have to be prepared to discount heavily in order to close the deal.
If you have a firm bottom line number, set your initial asking price to double that. Anything higher than twice your drop dead number will end up biting you in the end, because it will chase away any serious buyers who will never come back when you inevitably drop your price. If there is anyone out there willing to pay you more than you think your business is worth, they would have had already made you an offer. Selling any business for more than 80% of the market value of its tangible assets is really difficult so don't get greedy.
Transferring all IP: Assuming there isn't any overlap between the IP associated with the business you are selling and any other business or work you have, totally remove yourself from it. Any rights you retain will only reduce the value of your business and will create future nightmares for both you and the buyer. If there is some overlap, bundle that portion into a royalty free license with no support, but complete source code. Put a non-compete clause in the license if necessary, but that will also reduce the value of your business to a buyer.
Support: As little as possible. Offer to fix bugs for 6-12 months, and then kiss it goodbye.
Buyer from a different country: Your sale is governed by the laws of the country where your business is registered, but it is much more difficult to collect payment from foreign buyers (it doesn't matter where they are from, American buyers will stiff you just as quickly as Chinese buyers, because it is too expensive to go after your money in another country). Most businesses are sold in two parts, with half of the purchase price paid at a later date. The buyer should provide security for the final payment, with the option of giving the business back to you when the second payment is due.
Let me go back to price: By all means try to sell the business, but be prepared to sell an exclusive license instead. You have no idea how difficult it is to get a reasonable return on intangible assets. So swallow your pride and don't let your anger prevent you from getting anything in return for a declining business (if you don't have exponential growth after two years, it will decline without major changes to the product itself). Don't believe the "better marketing will turn this into a growing business" BS. The only thing to turn something with no growth today into future growth is a better product.
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