Episode 197 | How to Sell a Web Application (with Guest Thomas Smale)

Show Notes


[00:00]  Rob: In this episode of Startups for the Rest of Us Mike and I discuss how to sell a web application with guest Thomas Smale. This is Start-ups for the Rest of Us, episode 197.

[00:09] Music

[00:17] Rob: Welcome to Startups for the Rest of Us, the podcast that helps developers, designers, and entrepreneurs be awesome at launching software products, whether you build your first product or you’re just thinking about it. I’m Rob.

[00:26]  Mike: And I’m Mike

[00:27] Rob: And we’re here to share our experiences to help you avoid the same mistakes we’ve made. What’s the word this week, sir?

[00:31] Mike: Just before we got on this podcast I was interviewing somebody on oDesk to hire them to do some development on AuditShark. Get to the end of the interview and I was like, “Okay. So explain this all to you. Do you have any questions for me?” “No, no questions.” “Is this something that you’re interested in?” and he’s like, “Well, not really.”

[00:49] Rob: Wow, so he just turned it down?

[00:51] Mike: I hadn’t even gotten to the point where I was actually selecting a candidate, but yeah. He just said, “Yeah, it just sounds like I’m not really interested in doing the work that you want.” I’m like, “Alright.”

[00:58] Rob: Saves you time.

[00:59] Mike: Normally there’s people who’d be upset over that, but I was just like, “Man, thank you so much for saying you’re not interested, because you just saved me so much time and effort that I probably would have had to sink into this ongoing relationship.” I’m thankful he was upfront and just said, “Yeah, I’m not interested.” Move on.

[01:13] Rob: Rather than leading you on and then dropping off the map and not responding to your emails, you know, which is typically what happens.

[01:19] Mike: So I’ve learned to start asking that question though, because it really helps weed people out. Because if they’re not interested, that’s fine.

[01:26] Rob: Right. So Drip 2.0 is what I’m calling it. That’s all launched now, and that’s basically Drip with all the light-weight marketing automation built in. So Drip is now becoming a tool that is, I’m considering it it’s like an above MailChimp and Aweber in terms of power, and it’s below the Infusionsoft and the OfficeAutopilots. It’s gotten a lot of really good publicity. I published a couple blog posts in the past week.

[01:50]  One on the Drip blog that’s about how marketing automation is the future of email marketing, and the other one that I was surprised as much uptake it got is called the Biggest Gamble of Your Career. It’s over on softwarebyrob.com. It’s the first real blog post that I’ve done on my journey, because I tend to now document what I’m doing on this podcast. I really stopped blogging like I used to maybe 18 months ago, two years, I really slowed it down.

[02:13] This is kind of the first revealing of what’s been going on behind the scenes that I’ve done in a long time, and it sure seemed to strike a nerve with folks. It got a lot of shares and sent quite a lot of interested folks to try out Drip, so it feels really good. I mean this is something we’ve been working on since January, and finally to get it live last month and then really be able to start promoting it. Feels like we’ve hit another milestone with Drip.

[02:36] Mike: Very cool. What else you got going on?

[02:38] Rob: We got a tweet from My Egg Noodles, and he says, “A question I’d love to see you address on your podcast. Should your first hire focus on sales or marketing, or on product? The founder is comfortable with both. It would be good to get your thoughts on all product types.” What do you think about that?

[02:54] Mike: Well, I guess it depends on whether you’re- by comfortable, what does that really mean? Are you much better at one or the other? I think I’d look for the things that you procrastinate on doing and find somebody to do those.

[03:06] Rob: That’s a good way to look at it. The other thing- the other it depends is how far along is your app? Because some apps, or products as he said, because it may not necessarily be software, some products they become done. They become mature after a while. They may only be a single feature, and they just do it really well, and you don’t need to build much else. So if you hit that point then there’s really not a lot of ongoing development on it, whereas other products become more complicated and you branch into new audiences and they need a lot of development.

[03:37] I think if you’re in a market where you have competitors, and you’re trying to stay ahead of them in terms of product development, or you just know you have a lot feature requests from serious customers and you need to build a lot of stuff, I would have to say that I would lean towards hiring someone to do product while the founder does the sales and marketing. Of course it’s not the case in every case. I think like with HitTail, as an example, after I fixed a bunch of bugs couple years ago after I first acquired it, it didn’t need a ton of new features. So if I would have hired anyone, it would have been sales and marketing, because it just didn’t have that dire need of product development. I think product development for product development’s sake is a big mistake that some founders make. They just want to build more features because, well, that’s what we do, right? We’re creators, and a lot of times if you’re satisfying a market and you have that fit, you don’t necessarily need that new feature. It’s not actually going to move the needle for you at all.

[04:28] Mike: Yeah, I mean sometimes those new features can just cause more problems for you than anything else, because then it creates confusion over what the product does. I would almost say that in some ways MailChimp falls into this category for marketing automation. They’re great as an email service provider, but they came out with Mandrill, I think it was, for sending out transactional emails, and I never even looked at it, because I knew that I was just like, “Oh, well it’s MailChimp. That’s what they do is they do mass emails.” So it wasn’t to me their core focus. They may very well do it perfectly fine and maybe even better than other people at it, but I never even gave them a second look because that’s not what I knew them for.

[05:08] Music

[05:11] Rob: Today we interviewed Thomas Smale. He’s a website broker who runs FE International. Very pleased today to have Thomas Smale with us on the line. Thomas, thanks so much for staying up late there in the UK to join us on the podcast.

[05:26] Thomas: Yeah, hey. Thanks so much.

[05:27] Rob: So Thomas is a website broker. He runs FE International. They broker the purchases and sales of SaaS apps, downloadable software, WordPress plugins. Thomas, I’m assuming you also do niche sites, e-commerce, the whole gamut of web properties. Is that right?

[05:46] Thomas: Yeah we do all sorts if it’s online, we’ll do it. But we’ve done quite a lot of SaaS related apps recently.

[05:52] Rob: I really like the way Thomas operates. He’s very knowledgeable in terms of the buying and selling process. I like that he’s, unlike some other brokers that I’ve dealt with, he is very upfront with his thoughts and just seem to be very knowledgeable when I’ve dealt with him. I have looked at a few things that he’s had for sale. I haven’t acquired anything recently. I’ve also referred a few friends of the show will email and say, “Hey, I’m in a… and  I need to sell an app. What should I do?” and I typically refer them over to Thomas, just because I do trust that he’s going to handle everybody with kid gloves. So that’s why I wanted to have him on was to lend deeper insight, because though I’ve bought and sold a lot of apps and sites over the past several years, Thomas does this every day, and he has a company with six employees. Thomas you said you have six employees in London alone. Tell us where you have offices now.

[06:38] Thomas: Yes, we’ve got an office in London. We’ve got a couple of guys who work out of Europe. They work from home. We’ve got a small office in San Diego, and we’re also in the process of setting up an office in Boston. So there’s eight, nine of us at the moment, and we’re kind of actively hiring probably to fifteen within the next six months or so.

[06:57] Rob: Right, so you’re still quite a bit- I mean, you’re a start-up.

[06:59] Thomas: I guess with an advisory business you don’t necessarily need tons of staff. It’s more of a high-end service, I guess, rather than man-hours.

[07:09] Rob: Right. I kind of want to limit the conversation since our audience tends to focus on software. Like talk about SaaS, downloadable software, WordPress plugins, add-ons, that type of thing and not talk so much about e-commerce, niche sites and info products. I’d like to take it from a couple perspectives. I think we’ll start off with someone who is thinking about selling an app, because I get so many more of those requests than I do of people who are thinking about buying apps. But I think I’d like to maybe start off with, I guess, your credentials in terms of like, how many apps do you broker in a year buying and selling? Or how many total have you brokered? What numbers do you have to give us an idea of your experience level?

[07:48] Thomas: Yeah, sure. We’ve been around around four years now. I think the company’s been focused on brokerage for the last two, at least, maybe three. I’ve always brokered prior to that, and currently we also run a few of our own sites. I’ve run software products apps myself, so kind of got a wide range of experience. In terms of deal experience, last year I believe we did 78 transactions, but I’m generally speaking the size of those should be anywhere from 20, 30 thousand all the way up to the low 7 figure range. This year-to-date I believe we’ve done around 40 sales, total volume around 4 million. So we’re probably tracking by the end of the year 7, 8 million in sales, maybe 10, depending on how we get on. Then I would say of that 25 to 35% would be SaaS or apps, or whatever, and then the rest is quite evenly distributed across niche sites and e-commerce. So I’d probably say 20 apps a year.

[08:50] Rob: Couple apps a month, which is quite a bit a volume, because, you know, when I first got into this buying and selling I felt like, “Oh, this is such a liquid market, and there’s all this stuff moving all the time.” But there really aren’t that many sales when you get up above the $20,000 range.

[09:03] Thomas: Yeah, certainly when it comes to apps. I know across, well we were speaking just before the show about the other brokers out there, there aren’t all that many established brokers in the space we operate would be 50,000 to a million is 95% of our business and the same for other business brokers in the space. I know that we, of all the businesses we do, we are quite specialist in apps, so the market really isn’t that liquid, especially when it comes to brokerage sales, whether there’s a bigger market privately, I don’t know. But I would certainly say you’re correct in saying that there’s not hundreds of thousands of apps selling every year, especially through brokers.

[09:42] Rob: Which side is weaker, the demand or the supply side? Meaning are there a lot of apps out there and not enough buyers, or there a lot of buyers and not enough apps?

[09:50] Thomas: Yeah, I would definitely say, especially in the last twelve months or so, we’ve seen a lot of demand for- with buyers that is- for apps, especially SaaS in particular, and there’s a recurring element popular with buyers, I guess that the cash flow is slightly easier to predict. Macro tend to kind of if you go up to being, it’s like public companies and SaaS companies are trading at high multiples, so I guess it’s attracting people down the scale. I guess on the supply side there is certainly a lack of quality supply. There’s certainly supply there, but whether or not there any good or not is kind of a different matter. I think my reasoning on there not being that many is there’s a little bit of a grey area between- our average business will have anywhere from 100,000 to, say, 2 million a year in revenue, which is a kind of area that attracts a broker is too small for a merger and acquisition, small advisory firm.

[10:43] Anything smaller than that, it’s just not really big enough for a broker by the time you’ve gone through the process. As soon as you’ve got anything off the ground, once you start scaling through the process you can get to the stage where you might be looking to raise funding. So maybe as soon as you hit, say, a million dollars in revenue you might want to start raising funding. I think a lot of people as well, if you get to the stage where you’re making, let’s say, a couple of hundred thousand a year net, the exit isn’t always necessarily that attractive, because you tend to find with SaaS or software products in particular there’s a lot of burden on development up front. You can put two years into development before it’s even ready to go. So actually letting go of it- if you compare it to a niche site, where you might put 50 pages of content, build some links, and then it could be quite profitable, certainly wouldn’t really require any upfront work. It’s quite hard to let a business go for three times multiple, or whatever they’re selling for.

[11:37] So overall there’s definitely some solid and strong consistent buyer demand, and it think increasing as well. But then on the sales side there’s definitely a lack of quality supply. There’s certainly out there people looking to sell apps, but they might not be profitable, and that’s not really what I deal with. There may well be a more liquid market lower end, kind of a starter pathway. Where you’ve built the software, but it’s not profitable yet.

[12:02] Mike: It seems like there would be this large number of people who build an app, but they don’t really have an audience or they’re not able to get the sales, so they’ve got almost nothing to show for it. There’s no revenue there, so as you said, it’s not attractive to a broker. But if they can get things rolling, if it is a SaaS app and they’re able to get to a certain point it seems like if they’re able to 100, 200 thousand dollars a year in revenue then the inclination for people would be to grow that as high as they possibly can, which may very well take it kind of out of that brokerage space. I wonder if that’s some of the issue that you’re running into there.

[12:34] Thomas: Yeah, exactly. That some of what I was trying to explain. I think you get to a little bit of a grey area where it’s sort of a smaller, not profitable, so a least for a broker it’s not particularly attractive. And then beyond that, if you’re growing year on year and the business is going well why sell? Probably the most common reason we’ve seen people sell perfectly profitable businesses lately, I’d say the first reason would be the general time of commitment. They might have a full-time job, they might have another business, or they got other personal issue, whatever you want to call it. Then the other one, which is quite common, especially with people with a technical background, is they get it to a certain level, we tend to see maybe 100 to 500 thousand in revenue, so not insignificant, but not multimillion dollar exit stage. But because they have a software, financial background they don’t have that sales ability, so pushing it beyond the initial 100 to 200 customers is beyond their expertise, and you’re in that little bit of a grey area outside the “sell it” or “figure out a way to sell”. For a lot of people, especially technical founders, they tend to find that selling it and then starting something new is what they prefer to do.

[13:42] Rob: Yeah. That’s interesting. There’s a couple points that you raised that I’d like to touch on. One is you mention valuations. You mentioned like a 3 X valuation. Talk us through what types of valuations you see things selling at, and that includes- I’m actually interested to hear the difference between the SaaS and software stuff versus the e-commerce and niche side and info product stuff.

[14:02] Thomas: Yeah, so valuation is, especially from the broker side, is one of those consistently debated topics. We do enough sales now that I’ve got a pretty good grasp on valuation of where business come in. Generally speaking, this is where a lot of confusion, because a lot of brokers or individuals do it in a different way, but generally a business is sold on a multiple of- this is a small business, whereas you get larger you tend to have a multiple of EBITDAR, which is a slightly different calculation. But for small businesses, so if you’re going for a business broker sub 2 or 3 million, it’s generally a multiple of SD or SDC, which is Seller Discretionary Earnings or Discretionary Cash-flow.

[14:41] That is effectively a calculation of the net profit of the business. So taking into account all your revenue and then take off your operating expenses and everything like that. Then you add back, which is kind of a financial way of representing how much the earner’s benefiting from the business, you add back in what the earner’s getting paid. So let’s say you have 500,000 a year in revenue, and then you’ve got 200,000 a year in costs. That might be payment processer, hosting, affiliates, refunds. Then you pay yourself 200,000 a year as an owner. That then get added back so the actual profit is higher than whatever. So obviously with a small business, generally speaking, again I’m not a tax accountant or a lawyer, but generally speaking the administer made the business look the least amount profitable as possible when it comes to taxes.

[15:29] So owners tend to pay themselves more than they need to, or they will takes some benefits in the business. So you might if you’re 500,000 take off 300,000 in genuine costs so you get to a net of 200,000, but also 300,000 in costs 100,000 is your own pay, your insurance, your car, so it increases to 300,000 in that case. That’s your baseline number, and that’s generally where, at least a good broker, should help you wouldn’t expect to do that calculation yourself. Generally you’d expect to send your broker your profit and loss account, whether that’s QuickBooks or whatever accounting you use, especially you’ve got bigger sidings at least 100,000 in revenue you would hope you’re doing your account properly in that respect. Then from there, you have the financials, which is obviously number one variable is your underlying SD number or the SDC, or whatever. Then that is multiplied by a number, and that number is determined by- the main factors would the sustainability of the business, so is it growing? Is it in decline? As a rule of thumb if the business is in decline you’d expect to get a lower multiple than a business that’s growing.

[16:39] Is the business really hands-on and personalized? So if I owned thomassmale.com and thomassmale.com was a software product that let people sell their businesses in an easier way, than that’s going to be a lot harder to sell than if I had sellmybusiness.com, which is a software product not attached to me about selling a business. So if there’s a personalized element to it, it can be a little bit more difficult, or if it’s got any particular alliance. So especially with technical founders you tend to find they are the ones doing all the programming, so if they developed it all themselves and there’s no backup program or thing like that, then that can restrict the multiple.

[17:15] Although I’ve certainly seen recently that’s becoming less of an issues, and the kind of buyers we’re seeing at least, tend to be quite happy with the technical burden, and they tend to know what they’re doing on that front. We would come to that as a broker, I would come to the multiple number. You certainly wouldn’t expect to do that yourself, and if you are hiring a broker it’s certainly worth asking around and making sure that whatever valuation you’re given is actually based on some form of precedent. The number we use is based on sales we’ve done, so we have an internal database for the deals we have done, and we track all the different variable in that deal to figure out what the multiple’s going to be. It’s a somewhat scientific approach, yet with a little bit of gut feeling. It might be I think it’s worth 3 times the SD number, but expect to be offered 2.5 times, for whatever reason, or maybe expect the cash-down number to be a 2 times level. We do it based off the transactions we’ve done recently. There are other methodologies. I just tend to find that I like to be honest to people and give them a number I actually think it’s going to sell at. There’s no point in quoting a number that I’ve never seen before. Then when you actually get to the number itself, I mean it’s very difficult to give it a blanket multiple, because it really does depend on the business. But all variables being equal with SaaS app, recently we’ve been seeing multiples of almost exactly 3 times, very rarely goes much above that, and it rarely goes below that.

[18:44] In the range of, say, 2 and a half to 3 times, and that’s of the SD number. What a lot of people don’t realize is that you do add back your own salary, so a lot of people think their business isn’t actually profitable, then their net might actually be zero, but they pay themselves 200,000 a year. So that business could actually be worth 600,000. One thing that some people get a little bit confused with, a bit of a misconception, is that any kind of underlying IP doesn’t add value, it’s literally just a multiple of your SD, SDC number. If you’ve got just any sort of IP generally does not add any value at all. A lot of people think you can take a multiple and then go, “Oh yeah, and the software source code is worth 100,000, the domain is worth 50,000.” I have seen people try that methodology, but in my experience that’s not how buyers work, at least.

[19:31] Rob: Right. Yeah, that’s something I’ve been trying to explain to people for a long, long time, because back in- as I started acquiring stuff in 2007, 8, and 9 is really when I started diving into it, quickly realized that money talks. Right? It’s the revenue, it’s the net profit that really speaks to it. As developers we might spend six months of our nights and weekends and then feel like we have something that’s worth something, and unfortunately, until you hit a point where you’re actually making a profit, it’s not. What I find interesting is I’ve- historically when people ask, “What’s the range of what a SaaS app or downloadable software might sell for?” and this is over the past several years, I always say between 1 and 3 X. 1 and 3 times net profit is what I’d say. I find it interesting that it’s up closer to 3. That actually feels like a decent multiple. That’s not a bad amount of money to get for your app.

[20:20] Thomas: Yeah, I mean one caviat I’d say is- I guess as far as brokers go, we’re very fussy what we take on. I like to keep a success rate that’s almost 100%. It’s very rare for us to take on something that doesn’t sell. So generally speaking, we’re not going to be talking on the lower quality apps that might sell for 1 time. There certainly are apps out there that would sell for 1 times, but that just wouldn’t be through us. I guess we’re somewhat spoiled in that anything we do list is going to be good quality, and it’s in our best interests obviously. Good buyers want to buy good businesses. It’s not to say that they don’t sell for 1 time to 1 and a half times, but if you sell in the right place, we generally expect to get 2 and a half to 3 times of all the verticals we look at. When we’re looking through our present transactions- we put together a blog post recently on comparables, so niche sites, e-commerce sites, service-based businesses, SaaS apps, are the highest multiples of all the different verticals we sell. We’ve got a reasonably good sample size, so I say that that with a high degree of confidence.

[21:22] Butmy thought on that is mainly because the recurring revenue factor, I think especially for buyers who are new to the space, if you’re looking at a worst case scenario and you’ve got the recurring revenues in there, even if you can’t grow the business at all, you’re still going to get a returner investment after X number of years just from the current clients, minus the churn. Whereas if you buy a niche sit that has all it’s traffic from search engines and it just relies on 50 articles, if your ranking drops, say, 50% overnight, you get hit by a Panda update or a Penguin update, or whatever, might even drop more than that. You’re then pretty much down to zero. Whereas at least for SaaS you’ve always got that client baseline. I’m borrowing any technical disasters, and assuming the quality is decent you should get quite a decent ROI without even having to grow it.

[22:10] Rob: Right. Your blog is at feinternation.com/blog and we’ll link that up in the show notes, because it’s a very in-depth article. I actually tweeted it when it came out, and it got a lot of attention on Twitter, because you do have data, right? You have data that nobody else does.

[22:27] Thomas: Yeah, it’s based off our data. Other brokers with other people might have different experiences, but that’s based on our internal data. Like I said, I think we’ve done enough sales that we have quite a high degree of confidence in that.

[22:38] Rob: Yeah, it’s kind of cool you have an example. You have a travel blog that sold at 1.5 X. You have photography software that sold at 3.7 X. Do you have multiples here based on category?

[22:49] Thomas: No, we don’t publish the multiples. What we published was an index, just because the multiples [crosstalk] don’t like to publicize, because if I started saying every SaaS business will sell at 3 times, and then I speak to someone and it’s actually worth 2 times because the product is their name and it’s on a bit of decline then it becomes a little bit of an issue. So we’ve used an index, and if you look at the index you can see that SaaS sells the highest.

[23:13] Rob: SaaS is highest. E-commerce is just below it. Membership and subscriptions is very close to e-commerce. Then you have content and media, which I’m assuming is like blogs and –

[23:23] Thomas: Yeah, and niche sites.

[23:24] Rob: Niche sites. Okay, and then lead gen is below that.

[23:25] Thomas: Yeah, one caveat is you have with that is, obviously, we’ve had to categorize it into the different things, and there is some crossover. But the way it’s categorized, if you read the post, kind of hopefully should make sense.

[23:36] Rob: Sure.

[23:38] Mike: So one of the things that you mentioned is the low-quality apps that people have. Obviously you’ve touched on a couple of different things as to why it would kind of drive the multiple down. What sorts of things should people address to help clean up their app if they’re looking to sell it, because obviously you want to sell it at the best possible rate that you can? So what are some of the things that people can, essentially, focus their efforts on to help improve the amount of money that they’re going to get from selling their app?

[24:04] Thomas: Yeah, that’s a good question. That’s actually, I don’t know if all of you read Rob’s blog, but that’s what I guest posted about a few months ago over there. It’s actually what I spend a lot of my time doing. I tend to be a first protocol for sellers when they come in the door inquiring about selling their business, so I like to spend a lot of time dealing with people who want to sell but aren’t necessarily quite ready. I might help them put together a plan for making it more sellable. I’m not necessarily going to sit there on the phones trying to sell more product for them, but I help them in getting to a position where it’s sellable. If you go through some of the key points, there’s actually tons of different things you can do, but if you want to focus on a few, the first one is transferability, how transferrable is everything. For example, payment processor, you can to go really down to the technical side of code, so if you’re a technical founder. You built it all yourself, you might have taught yourself programming, if you haven’t documented your code properly then that’s going to be difficult to transfer.

[25:03] Again, that’s the whole personalized side of things. If you’ve got your name all over it then it’s going to be a little bit harder to sell, and so look to depersonalize. We’ve done a few sales recently where people might get a lot of sales from their own blog or their own reputation, or whatever, so that’s something that will be into consideration when it comes to multiple. So depersonalize it as much as you can. Make sure if things transferrable so payment process kind of keep it clean. Try and keep the business consistent. A lot of people have this misconception that when you’re coming up to sale because your underlying net number is the most important, they try and bump it with fire sales, or trying to sell a load of annual subscriptions, or anything like that. So the actually worst thing you can do prior to sale is sell everybody on a 3 year subscription, because obviously when the buyer takes it over that’s not cash-flow they’re going to benefit from, and you tend to be expected to rebate that. So try and avoid selling really long annual subscriptions, because it can quite problematic, and just try and keep the business consistent. It’s good to see a business is on a general incline, but you don’t want to see anything that’s drastically jumped up. It just looks suspicious, and it’s very rare for that to be genuine.

[26:14] And vice versa don’t do anything stupid that will lose revenue. So if you’ve been meaning to do anything for a while, get it out the way. Just don’t try and sell it in a period when you’re in the middle of redesigning, or anything like that. Probably one of the biggest headaches for brokers is general documentation. When it comes to accounts, make sure your accounts in line. Ideally have them- something like QuickBooks or something similar. Hopefully you’ve got an accountant, or whatever, who can help you prepare those. Having your books in order is absolutely essential. We certainly don’t take on anything if you can’t provide accounts, and if you can’t prove those numbers. There’s no point in saying, “Hey, Oh! I make a million dollars a year.” But you can only prove 500,000. So make sure you can prove it all. Make sure it’s properly documented in an easy-to-understand way. It’s easier for a broker and easier for a buyer to understand if you’ve kept clean records. Then keep track of all your data, it’s something that you tend to find technical founders are quite good at. They might struggle on the sales side, if I’m making generalizations, but on the flip side when it comes to general data and metric tracking, they tend to be quite good. Simple things, like make sure you’ve got Google analytics on the site, or whatever analytics you want to use.

[27:24] Make sure you track conversions, track goals, track your financials properly, like what I was just saying, and track all your metrics. This is something that quite a few, especially smaller apps don’t seem to do, and that’s make sure you track your things like- a buyer will always want to know- we tend to provide a table, almost a page of general questions people are going to ask, particularly about SaaS businesses. That’s just basic things like know what your churn rate is, know what your customer lifetime value is, how long does the customer stay in months. There’s absolutely tons of things in there. Make sure you know. This is where a business that is a little bit older helps. If you’ve got a business that’s only 6 months old, it’s impossible for you to know lifetime value of your client. You got no idea how long anyone stays around. So the older it is and the more dates you’ve got the more likely you are to get a higher multiple, because it’s a little bit more predictable. You don’t necessarily need to be able to calculate that number yourself, but at least be able to provide that data to the broker.

[28:23] We spend a lot of time playing around with Excel, trying to like figure out these numbers, but it’s definitely important you can at least provide it. So don’t necessarily worry if you can’t work it out yourself, but track everything, and generally just try and be as transparent as possible. Don’t hold things back or try and hide things, because that really is something that can completely kill a sale. Probably the number one reason don’t sell is because its been so misrepresented. If you’re honest and upfront with the broker or with the buyer or whoever, you can generally find creative ways around problems. But if you try and hide things, that’s probably the number one reason it’s not going to sell.

[28:58] Rob: I like one of the other points you mentioned in that blog post on my blog was to build and utilize a mailing list. Since I own Drip, which is obviously a mailing list manager, I thought that was an interesting point. Having a mailing list is- I know it’s an asset, right? I’ve banked a lot on newsletters and having a list of folks over the years, but I guess I hadn’t thought that a potential buyer would necessarily value that.

[29:24] Thomas: Yeah, a mailing list can be quite a valuable asset. When you’re looking at mailing lists in general, just any sustainable part of the business, people say whether that’s a mailing list, whether it’s, I don’t know, say, a weekly webinar with your subscribers. Anything that kind of keeps people coming back or provides a sales funnel, so when it comes to mailing lists if you do a free trial, or whatever, if you’ve got a great process in place to convert people from a free trial to a paid account then that’s great. Whether that’s through a mailing list, whether it’s through webinars, whether it’s through telly sales, or whatever, just have things sustainable. I mentioned mailing lists as something that most people have but don’t really use very well. It’s surprising how many people have thousands of customers, but they’ve never emailed them. So even if you’re not the best salesman in the world at least email them once a month, even if you’re just linking out to general industry news, because people- buyers especially- if you’ve got an active mailing list it tends to be a positive signal that the product’s good. I would always be a little suspicious as a buyer if you say, “Hey, look. Yeah, everyone loves the product. We got a thousand customers, and they all love it.” But no one speaks to you, no one replies, you don’t email them. That’s where you can kind of get a few difficulties.

[30:34] Mike: So Thomas, when people are going through this process, roughly how long does it take to broker a sale, between the time that somebody first talks to you and the time that the application, or the product, is actually sold to a buyer?

[30:47] Thomas: The biggest headaches for me is that the actual process can be all over the place. So we’ve split into two parts, getting it ready for sale is where there’s all sorts of variants. It could be, if everything’s in order, and people have hopefully read that post I’ve put on Rob’s blog, and they’ve got everything in order it can take us two weeks to prep. Quite often people will come to me, and it might not be ready to sell at all, and there might be a two year gap. I was speaking to people four years ago who are coming back now saying, “Hey, look. I’ve gotten everything you’ve said.” Once you’re at the stage that it is sellable, so we’ll make that assumption, it generally takes us with SaaS businesses usually two weeks to prepare everything, so getting through the financials and getting through some initial questions, so like a kind of discovery phase. I tend to say to people, “We’ll work as fast as you do.” So if you provide everything, get through all the basic due diligence process before we list anything. So generally two weeks to get it to the sell stage.

[31:41] Depending on the size of it, how quickly you get offers kind of really depends where you sell. We would expect to see offers come in, assuming it’s not a huge business where they can take a little bit longer, you’d expect to see some offers within the first month. You’d generally expect to accept an offer by the end of month 2. That’s why there’s quite a big range. Sometimes you could get an offer within a week, other times it might take 6 weeks. The process from there, so let’s assume you’ve got an offer and taken it to the next stage, assuming you’ve qualified the buyer properly, or your broker has hopefully qualified the buyer properly to make sure they can actually complete on the sale, they’ve got the cash.

[32:20] They’re not going to run off scared or anything. You then get to a due diligence phase, which for, let’s say a $300,000 business, you would expect that to take 3 to 4 weeks, maybe a little bit less. It depends, again, on how well documented you are, and that’s just things like verifying your income, verifying your traffic, verifying your metrics, verifying your code base. All those kind of things, so expect due diligence to take 3 weeks, 4 weeks. It can be a lot quicker, but it’s definitely not a stage of the transaction you want to rush. Then from there you get into contract negotiations and hopefully if you’ve done everything properly, the vast majority of the major terms will be outlined in the initial LOI, which is a Letter of Intent, we use as kind of a formal offer. So you submit an LOI and then it’d be accepted as an offer, and this is where we would- we got an internal team full of legal experience who would draft a purchase agreement. Then we’re not lawyers, and you certainly not rely on your broker to say the contract is fine. Always speak to an independent legal, and then however long that takes. Generally not too long. We’ll get contracts out pretty quickly, depending on the complexity of it. Obviously some contracts can take longer than others. Assuming the broker’s done their job properly up-front, that process shouldn’t take too long. The transfer process with SaaS businesses, they tend to be one of the longest in terms of transfer time, just because they can be quite complicated. You’ve got recurring subscriptions in there, so sometimes it can take some time to transfer the payment process to get up to speed with everything.

[33:50] But that process, on average, I would say 2 weeks, and then from there you would obviously at that stage hopefully get paid. Then there’s generally going to be a support period. My general rule of thumb is 3 months, especially with technical SaaS products in the 6-figure range, but that’s really something that’s negotiated up-front. Generally you wouldn’t want to stay along much longer than that for free. It’s quite common to negotiate in a consulting period, be on that at a fixed rate. If you’re a technical founder you might agree to an hourly rate for technical work. You might say, “Hey, look. I want to sell the business because I haven’t got any time, but I’ll happily commit to coding future features for you at 100 bucks an hour.” So hopefully that’s sort of agreed up-front. The process on average is 3 to 4 months, but that’s a realistic average if you want to do everything properly. It certainly can be done quicker, but we tend to find that if we stick to a consistent process there are no nasty surprises along the way, which can happen if you try and rush it through in, say, 2 weeks.

[34:48] Mike: So it sounds like 6 months is really not all that bad, considering you hear about some of these larger acquisitions for multiple millions of dollars, and they take a year at least, sometimes 2 to figure out before it even comes to the public.

[35:02] Thomas: Yeah, absolutely. We would generally hope to get it sold quick in the 6 months, but if you bank for 6 months, that should be more than reasonable. I tend to say to people if that hasn’t sold in that time, which is quite rare with how fussy I am, but if something hasn’t sold in that time, it’s probably not going to sell at all, at least through that particular broker or sales channel.

[35:21] Rob: Very cool. Really appreciate your time today, Thomas. Where can folks get in touch with you if they want to find you on the web?

[35:30] Thomas: Yeah, so if you can go direct to our website, you got feinternational.com we’ve got a blog that you mentioned which is forward slash blog. My direct email now is Thomas, T-H-O-M-A-S, at FE International, but then if you go on our site you’ll see pages if you want to buy a site, we’ve got pages there, sell a site, the same if you generally want to contact. But if you email me I’m always happy to help people if they’re looking to kind of prepare for a sale, whether it’s 6 months, 12 months down the line. There’s no obligation. I don’t charge for that initial advice, and I’m generally, I like to think, quite friendly and responsive.

[36:03] Rob: Indeed. That’s what I’ve enjoyed about you. You respond to email at odd times of the day because you work until late.

[36:11] Thomas: Yeah, tend to have quite an international client base. I guess one of the problems for being an entrepreneur is you tend to be available 24/7.

[36:17] Rob: Yep, exactly. Well thanks again for coming on, Thomas, and I hope some folks get in touch with you.

[36:23] Thomas: Yeah, thanks very much.

[36:24] Mike: If you have a question for us you can call it into our voicemail number at 1-888-801-9690 or you can email it to us at questions at startupsfortherestofus.com. Our theme music is an excerpt from “We’re out of Control” by Moot used under creative commons. You can subscribe to us in iTunes by searching for startups, or by RSS at startupsfortherestofus.com where you’ll also find a full transcript of each episode. Thanks for listening, and we’ll see you next time.

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One Response to “Episode 197 | How to Sell a Web Application (with Guest Thomas Smale)”

  1. Sick interview, it was due.
    That revenue, spent on a brew.
    Great review, how anew!