“Why don’t you just sell it?”
I created ClientSpot, a software as a service project management solution, back in 2008.
Six years into running the business, it was making a steady profit and I had:
- done at least two major user interface overhauls,
- added a whole bucketload of new features,
- tuned performance,
- obsessed about failover and data redundancy,
- redesigned the website several times,
- done A/B testing,
- experimented with dozens of marketing tactics,
- supported nearly a thousand customers,
- and just about everything else you can imagine.
As much as I loved the product I had built, I was tired. Plus, I recently joined a venture-backed startup as a co-founder (that’s another story), so now I was busy AND burnt out.
Meanwhile, I had a backlog of feature requests that customers had been waiting on, but the few hours a day I spent on ClientSpot customer support, coupled with the amount of time and energy I spent on the new new venture, left me with no time to get to any of them.
After a year of this limbo state, growth stalled, and new customer conversions declined. Even more competitors were entering the project mangement space, with fresh, sexy designs. I knew I needed to do something to keep pace, but I couldn’t find the time and energy I thought ClientSpot would need to keep growing.
So, why don’t you just sell it? Aren’t there people you could sell it to? Don’t you know people who sold their products?
After patiently listening to yet another venting session from me on how stressed I was about neglecting ClientSpot because I was so busy on the new startup, my wife, Lisa, asked me the above questions. She encouraged me to reach out to someone in the tech community to get information.
Turns out, I did know people who had been through that process. Yet strangely, it never occurred to me to ask them about it.
I sent an email to Rob Walling, who I had met several times at the Microconf software founders conference. I knew he had experience buying and selling several web businesses.
So…I’m considering selling my product business - any idea where to start?
Rob quickly responded and asked me a few questions about the business and its current revenue, and then gave me the names of some brokers to contact.
It turns out that if your business is generating at least a few thousand in monthly revenue, there are business brokers who can help find buyers for you and manage the whole process for a percentage of the sale. In fact, it’s a lot like selling a house.
“What’s my business worth?”
I contacted a business broker at FE International to start a conversation. They explained that the first step was to figure out a valuation so I could decide whether it was worth it to me to sell.
It started with me filling out a basic spreadsheet of finanacials for the last 12 months. Income by source, and expenses by type for the previous 12 - 18 months. They also wanted a look at my Google Analytics to see things like traffic volume, where it was coming from primarily, and trends over time.
What they were looking for (I learned later) is the consistency and/or growth of the business over the last 12 months. This has some important implications:
1) it’s harder to sell something without a track record (scarier to buyers, and harder to value), 2) a declining business has less value than a growing one, and 3) buyers want to know how you are marketing, and whether it’s getting easier or harder
After all of the spreadsheets and some questions about why I wanted to sell, the broker was able to give me an estimated valuation of the business, which was roughly 2.8x net profit (profit after expenses, not including money I paid myself).
For a typical web-based subscription business making roughly $5k per month in net profit ($60k annually), that would mean a valuation of roughly $150k. For a business making $10k per month net profit, the valuation would be closer to $300k.
My understanding was that a stable, steady business could fetch a sales price of 3.0x net profit, where a slowly declining one probably would be towards the 2.5x side, and a quickly growing business with some track record could get significantly better (3.5x+).
Ultimately though, a business is worth what a buyer is willing to pay for it.
According to the broker, given all of my numbers and input, I was likely to get a sale price solidly in the 3x net profit range, and that my offering would be likely to attract multiple buyers.
At that valuation, this would mean a healthy six-figure payout for ClientSpot. That would protect me from the downside of the new venture I was involved in, and let a new owner keep ClientSpot not just on life support, but help it grow and thrive. The decision for me was easy. I was ready to sell.
But this was all still theoretical. For the broker to actually post a listing for sale, there was work to be done. And quite a bit of it.
I’ll cover that in Part 2, along with how the process played out, and how I chose a buyer (there were multiple offers, from VERY different types).