Under the Radar

00:00:00 ◼   ► - Welcome to Under the Radar,

00:00:01 ◼   ► a show about independent iOS app development.

00:00:03 ◼   ► I'm Marco Arment.

00:00:05 ◼   ► - And I'm David Smith.

00:00:06 ◼   ► Under the Radar is never longer than 30 minutes,

00:00:08 ◼   ► so let's get started.

00:00:09 ◼   ► - So last week we talked about one way to structure

00:00:13 ◼   ► your individual app business and it kind of focused on

00:00:17 ◼   ► building up a portfolio of apps over time

00:00:20 ◼   ► that kind of just run indefinitely

00:00:22 ◼   ► and provide you with decreasing over time revenue,

00:00:26 ◼   ► but that still stays,

00:00:28 ◼   ► the sum of which can stay substantial enough

00:00:30 ◼   ► to keep you going.

00:00:31 ◼   ► So you kind of just let apps slowly fade into the sunset

00:00:34 ◼   ► over a long period of time.

00:00:36 ◼   ► An alternative to that for some apps or for some people

00:00:40 ◼   ► is selling apps to people, to acquirers in some form.

00:00:44 ◼   ► We'll talk about that this week.

00:00:46 ◼   ► More about how you build an app for sale,

00:00:50 ◼   ► how you consider what it would be like to sell it

00:00:52 ◼   ► later down the road,

00:00:54 ◼   ► and then certain different considerations you might take.

00:00:57 ◼   ► And then how to structure that deal

00:01:00 ◼   ► and what kind of, how to value your app

00:01:02 ◼   ► and how you expect to get paid over time.

00:01:06 ◼   ► So I think the first thing to look at is building an app

00:01:11 ◼   ► with sale in mind, so with future sale in mind.

00:01:15 ◼   ► One of the most obvious things is legally,

00:01:18 ◼   ► and you should be doing this anyway,

00:01:20 ◼   ► it is beneficial to have a separate business entity

00:01:23 ◼   ► for your apps.

00:01:25 ◼   ► Whether you have one entity with all your apps under it

00:01:27 ◼   ► or separate entities per app,

00:01:29 ◼   ► that's between you and your accountant and your lawyer.

00:01:32 ◼   ► By the way, please hire an accountant and a lawyer

00:01:35 ◼   ► to set this up for you.

00:01:36 ◼   ► And I don't really have a strong opinion either way,

00:01:40 ◼   ► whether you do things under separate LLCs or not.

00:01:42 ◼   ► I have done separate LLCs for most of my big things,

00:01:46 ◼   ► but then I have one kind of catch-all

00:01:49 ◼   ► that has everything else,

00:01:51 ◼   ► all the podcasts and blog income and everything.

00:01:53 ◼   ► I can see the advantages of both systems.

00:01:56 ◼   ► In reality, when it comes time for acquisitions,

00:02:00 ◼   ► there's not a lot of strong opinion one way or the other

00:02:03 ◼   ► because doing separate LLCs for everything

00:02:07 ◼   ► is a lot of overhead, and a lot of times an acquirer

00:02:10 ◼   ► doesn't want to buy the business,

00:02:11 ◼   ► they wanna buy the business's assets.

00:02:13 ◼   ► So it might not even be worth it in the long run.

00:02:16 ◼   ► One area where it is very helpful to have separate accounts

00:02:21 ◼   ► is the Apple developer account.

00:02:24 ◼   ► Because if you sell an app,

00:02:27 ◼   ► Apple has a way that you can transfer an app.

00:02:29 ◼   ► Now they didn't for a long time.

00:02:30 ◼   ► They have a way you can transfer an app

00:02:32 ◼   ► to an acquirer from your developer account,

00:02:34 ◼   ► but there's a lot of limitations on that.

00:02:36 ◼   ► One of the biggest ones that is still standing today,

00:02:40 ◼   ► and I'm not sure, I don't know if they've ever said

00:02:42 ◼   ► if it's gonna go away in the future or not,

00:02:44 ◼   ► but they probably haven't,

00:02:45 ◼   ► is that if your app has ever used certain entitlements,

00:02:48 ◼   ► such as iCloud, it just can't be transferred ever.

00:02:52 ◼   ► And so there's a lot of reasons why

00:02:55 ◼   ► having separate Apple developer accounts

00:02:58 ◼   ► for separate apps makes sense.

00:02:59 ◼   ► And the easiest way to do that

00:03:01 ◼   ► within the bounds of what Apple allows

00:03:03 ◼   ► is to have them be separate business entities.

00:03:05 ◼   ► So that is one big advantage there.

00:03:07 ◼   ► But other than that, I don't really have a lot to say

00:03:09 ◼   ► on that topic, do you?

00:03:11 ◼   ► - No, I mean, I think the biggest thing with that topic is

00:03:14 ◼   ► if this is something that you can see yourself

00:03:17 ◼   ► wanting to do down the road,

00:03:19 ◼   ► it's good to have that end in mind

00:03:22 ◼   ► when you're setting things up initially.

00:03:24 ◼   ► Because whatever approach you take,

00:03:27 ◼   ► and that will vary wildly depending on all kinds of things,

00:03:30 ◼   ► and I imagine it varies by country.

00:03:32 ◼   ► If you're a developer in a country

00:03:34 ◼   ► other than the United States,

00:03:35 ◼   ► you may have different rules

00:03:36 ◼   ► or different requirements for things,

00:03:37 ◼   ► but it's something that you wanna keep in mind.

00:03:40 ◼   ► And then as you're developing,

00:03:41 ◼   ► it's something that you wanna keep

00:03:42 ◼   ► in the back of your mind too.

00:03:46 ◼   ► After Apple announced that they have this new

00:03:49 ◼   ► you can transfer apps, but not if you've enabled iCloud,

00:03:52 ◼   ► for example, I think long and hard about

00:03:56 ◼   ► if I ever wanna push that button in the developer portal

00:03:59 ◼   ► to enable the entitlement,

00:04:02 ◼   ► because I have in my mind that like,

00:04:04 ◼   ► is this an app that I could see selling?

00:04:07 ◼   ► Is this an app that I would like to have

00:04:09 ◼   ► that opportunity to easily transfer it to another account

00:04:12 ◼   ► or not?

00:04:13 ◼   ► And I think it's good to be conscious of that

00:04:15 ◼   ► as you're going through that

00:04:16 ◼   ► rather than just like you go into the developer portal,

00:04:19 ◼   ► you're setting up an app and it's like,

00:04:20 ◼   ► oh yeah, let me just check all the boxes.

00:04:23 ◼   ► Like that approach is not great in this case,

00:04:27 ◼   ► 'cause you may find yourself stuck down the road

00:04:30 ◼   ► even if you've never used iCloud.

00:04:32 ◼   ► And it's not the kind of thing that you can like

00:04:33 ◼   ► pull iCloud out of your application

00:04:35 ◼   ► and then suddenly you can transfer it.

00:04:37 ◼   ► It's like, if you've ever pushed that button once

00:04:40 ◼   ► in the developer portal,

00:04:41 ◼   ► the app will be forever ineligible for transfer.

00:04:44 ◼   ► And so you'd have to then,

00:04:45 ◼   ► be doing things that are more like

00:04:47 ◼   ► transferring the business entity,

00:04:50 ◼   ► or like creating a subsidiary of the company

00:04:52 ◼   ► that the app is then like moved into,

00:04:55 ◼   ► or then they purchase just that like subsidiary,

00:04:58 ◼   ► like things would get more complicated.

00:05:00 ◼   ► And so if this is something that you would ever want to do,

00:05:03 ◼   ► be thoughtful about that.

00:05:04 ◼   ► Be thinking about it

00:05:05 ◼   ► in terms of how you set up your business stuff,

00:05:07 ◼   ► as well as how you set up your stuff

00:05:09 ◼   ► within your developer account.

00:05:11 ◼   ► - Exactly.

00:05:12 ◼   ► And beyond the developer account question,

00:05:15 ◼   ► everything else about keeping things separate

00:05:17 ◼   ► is generally just like a good idea to do anyway

00:05:20 ◼   ► for accounting reasons or for legal reasons.

00:05:22 ◼   ► So for instance, like obviously have like

00:05:24 ◼   ► a separate business bank account.

00:05:25 ◼   ► That's step number one.

00:05:27 ◼   ► And hopefully as some kind of entity,

00:05:29 ◼   ► whether it's an LLC or incorporated,

00:05:32 ◼   ► that's up to you and your accountant and lawyer again.

00:05:34 ◼   ► But also things like service accounts,

00:05:37 ◼   ► like your web host, like I use Linode for all my stuff.

00:05:41 ◼   ► I don't have just one Linode account.

00:05:42 ◼   ► I have two.

00:05:43 ◼   ► I have one for one LLC that has like my blog

00:05:46 ◼   ► and podcast stuff.

00:05:47 ◼   ► And I have a separate account for Overcast

00:05:49 ◼   ► 'cause that's a separate LLC, it's a separate business.

00:05:51 ◼   ► And then if Overcast later gets acquired,

00:05:54 ◼   ► which by the way I don't foresee happening

00:05:56 ◼   ► in the near future, but if for some reason it would,

00:05:59 ◼   ► theoretically, then it's easier

00:06:01 ◼   ► because everything is already separate

00:06:03 ◼   ► from other business assets.

00:06:06 ◼   ► And again, it will depend on what kind of style

00:06:09 ◼   ► of business you run, like how much of a burden this is.

00:06:12 ◼   ► If you have tons and tons of small apps,

00:06:14 ◼   ► this is gonna be hard to do.

00:06:16 ◼   ► But if you have a smaller number of bigger apps,

00:06:19 ◼   ► this will be easier and more worthwhile.

00:06:22 ◼   ► And chances are, if you have bigger apps,

00:06:25 ◼   ► that's gonna be more likely to be up for the question

00:06:28 ◼   ► of whether you wanna sell them to begin with.

00:06:30 ◼   ► So that's probably more of what you're looking for here.

00:06:32 ◼   ► So another thing to think about is,

00:06:37 ◼   ► when you're building an app for potential future sale,

00:06:41 ◼   ► how much do you want to sacrifice revenue now

00:06:45 ◼   ► for potential revenue down the road in an acquisition?

00:06:47 ◼   ► So that might inform decisions about pricing, for instance.

00:06:51 ◼   ► So if you want, if you're aiming for an acquisition

00:06:54 ◼   ► down the road, what you want more of anything of is users,

00:06:58 ◼   ► because users are valuable for acquirers, usually.

00:07:00 ◼   ► If you wanna get big up front,

00:07:03 ◼   ► then you're gonna need to probably take less money up front

00:07:06 ◼   ► than you could if you just made a nice productivity app

00:07:11 ◼   ► and charged $10 for it and sold it in the store.

00:07:14 ◼   ► If instead, you build up a whole community of users

00:07:17 ◼   ► that all came for free, 'cause it was easy,

00:07:19 ◼   ► 'cause it was free, there's no barrier there to entry,

00:07:23 ◼   ► that would be better for an acquisition down the road,

00:07:25 ◼   ► but that's a riskier bet, because you might not get acquired

00:07:27 ◼   ► down the road and then you've made nothing.

00:07:29 ◼   ► This is why that model is usually funded by VC,

00:07:32 ◼   ► because it's a huge, risky gamble

00:07:36 ◼   ► and probably an ill-advised one

00:07:38 ◼   ► to do that with your own money backing it.

00:07:40 ◼   ► So the VC model, one of the reasons why acquisitions

00:07:44 ◼   ► happen more often in VC than outside of it,

00:07:47 ◼   ► at least as far as we can see,

00:07:49 ◼   ► is that it is easier to build up a big company faster

00:07:54 ◼   ► if you are not concerned about making money immediately.

00:07:58 ◼   ► And if you are, if you try to make money from day one,

00:08:00 ◼   ► like we do, that's going to be a slower growth period,

00:08:04 ◼   ► in most cases.

00:08:05 ◼   ► That being said, that might also inform things

00:08:07 ◼   ► like where you make your money.

00:08:09 ◼   ► So, you know, Overcast has been profitable since day one,

00:08:13 ◼   ► but also on day one, I decided to make the app free.

00:08:17 ◼   ► So if it's free up front, and I had in-app purchase

00:08:20 ◼   ► for other stuff, and that's been the model since day one

00:08:22 ◼   ► for lots of reasons, but mainly I wanted to maximize

00:08:26 ◼   ► the audience of the app, and I decided profit

00:08:28 ◼   ► was secondary to that.

00:08:29 ◼   ► I still needed profit, but that it was secondary to that.

00:08:32 ◼   ► And that will also help you, you know, if down the road

00:08:34 ◼   ► you decide to sell an app, having taken that kind

00:08:36 ◼   ► of approach will probably benefit you in a lot of cases.

00:08:39 ◼   ► Because you will have more users, you'll have a bigger

00:08:42 ◼   ► audience behind it, and that will all add to its value

00:08:45 ◼   ► to an acquirer.

00:08:46 ◼   ► - Yeah, and I think too, it's a difference of mindset,

00:08:52 ◼   ► where if you're trying to groom an application

00:08:56 ◼   ► for potential sale, you need something to sell it on

00:09:00 ◼   ► that's impressive.

00:09:02 ◼   ► And like, inevitably, this is going to, you know,

00:09:04 ◼   ► like you're going to attract somebody's, you know,

00:09:07 ◼   ► typically it's going to be, you know, some large corporation

00:09:11 ◼   ► is going to buy your app because it has something

00:09:14 ◼   ► that they want, that they can't easily get themselves,

00:09:17 ◼   ► and it's cheaper for them to purchase, you know,

00:09:20 ◼   ► as a bundle rather than like compete with you directly.

00:09:23 ◼   ► And, you know, more often than not, the thing that they

00:09:26 ◼   ► are going to be wanting is your user base,

00:09:29 ◼   ► is your customer base.

00:09:31 ◼   ► You know, if your app is, you know, is high in revenue,

00:09:36 ◼   ► you know, sort of with a small user base,

00:09:39 ◼   ► then it's probably going to be less, in some ways,

00:09:41 ◼   ► less appealing to refer a company to buy because

00:09:45 ◼   ► they're going to have to pay so much for it.

00:09:48 ◼   ► You know, if your app is making lots and lots of money

00:09:50 ◼   ► for you, in order for someone, for you to want to part

00:09:53 ◼   ► with it, they're going to need to pay you very well for that.

00:09:55 ◼   ► And so, if it's, however, if it just has a large amount

00:09:59 ◼   ► of sort of relatively unmonetized users,

00:10:03 ◼   ► that is a more straightforward thing, I think,

00:10:07 ◼   ► for someone to view as it's valuable to them because

00:10:09 ◼   ► they have other ways to monetize it, or the value to it

00:10:11 ◼   ► isn't in direct monetization, it's in something else.

00:10:16 ◼   ► You know, it's more of a brand move, or who knows what.

00:10:19 ◼   ► Like, there's lots of things that larger companies,

00:10:21 ◼   ► their goals might be different than your goals.

00:10:23 ◼   ► You know, with, for most small independent businesses,

00:10:26 ◼   ► like my goal is mostly just income.

00:10:28 ◼   ► I'm not having these kind of these big, broad things where,

00:10:32 ◼   ► you know, a larger company may have, you know,

00:10:35 ◼   ► several million dollars in advertising budget that,

00:10:39 ◼   ► for them, acquiring an application for one or two million

00:10:42 ◼   ► dollars, if it's just like, could just be an advertising

00:10:44 ◼   ► expense, essentially, and they just want to put their name

00:10:47 ◼   ► on something that is in front of a group of irrelevant

00:10:50 ◼   ► demographic of people.

00:10:52 ◼   ► And so, like, their goals may not be your goals directly,

00:10:56 ◼   ► but I think the more important thing to keep in mind is,

00:10:59 ◼   ► you know, you're going to, if you want to sell an application

00:11:02 ◼   ► you need to be selling it based on something that's,

00:11:05 ◼   ► you know, some impressive metric.

00:11:07 ◼   ► You know, there's probably gonna be discussions about things

00:11:10 ◼   ► like the KPIs, the key performance indicators,

00:11:13 ◼   ► and you know, what's your retention rate,

00:11:15 ◼   ► what's your growth rate, you know, what's your rate rate?

00:11:19 ◼   ► I don't know, like, all of those numbers are things

00:11:21 ◼   ► that you're probably going to need to have, like,

00:11:24 ◼   ► good, nice graphs that, you know, go up and to the right.

00:11:27 ◼   ► (laughing)

00:11:28 ◼   ► Like, that's ultimately what you're going to want

00:11:30 ◼   ► if you're going to sell it, and so, you know,

00:11:32 ◼   ► structure your application to maximize those things.

00:11:36 ◼   ► And, you know, at a certain point it can start to get,

00:11:38 ◼   ► you know, you start to get kind of sketchy and things,

00:11:40 ◼   ► like, if you want, if that's all you're trying to do,

00:11:42 ◼   ► if you're doing the, what is it they call it,

00:11:44 ◼   ► the growth hacking, like, if that's your goal,

00:11:46 ◼   ► is just to get the most number of people in your app,

00:11:49 ◼   ► you start doing, you know, funny things, like, hey,

00:11:51 ◼   ► here's lots of push notifications, here's lots of things

00:11:54 ◼   ► to pull you back in, maybe not so great,

00:11:57 ◼   ► but in a weird way, like, if those numbers are the things

00:12:00 ◼   ► that you're optimizing for, those behaviors and approaches

00:12:04 ◼   ► are the things that make the most sense as a result.

00:12:07 ◼   ► - Exactly, and, you know, as you mentioned, like,

00:12:10 ◼   ► if you, if there's something about your app

00:12:13 ◼   ► that would make a company pay a premium for it,

00:12:17 ◼   ► you know, that's almost kind of luck,

00:12:19 ◼   ► like, whether that will happen to you or not,

00:12:21 ◼   ► like, one of the, like, an example of this is, like,

00:12:23 ◼   ► when Facebook bought Instagram, you know,

00:12:26 ◼   ► Facebook was clearly freaked out because photo sharing

00:12:29 ◼   ► is core to Facebook's business, and they were losing

00:12:32 ◼   ► a bunch of photo sharing on, like, the new hot growth

00:12:35 ◼   ► platform of the smartphone to this little startup

00:12:37 ◼   ► called Instagram that was kind of eating their lunch,

00:12:40 ◼   ► so Facebook freaked out and threw a massive amount

00:12:42 ◼   ► of money at them, and that's, anytime you can scare

00:12:46 ◼   ► a large company about threatening their core business,

00:12:49 ◼   ► that's a pretty good way to get, like,

00:12:51 ◼   ► an extra high valuation of your app, or, you know,

00:12:54 ◼   ► you can do things like, like, when a tech giant,

00:12:57 ◼   ► like, an old tech giant, like AOL or Yahoo, you know,

00:13:01 ◼   ► these companies tend to have a lot of money

00:13:04 ◼   ► from, like, their old businesses and old revenue streams,

00:13:07 ◼   ► but they don't tend to have a lot of modern relevance,

00:13:10 ◼   ► or, like, especially with younger audiences,

00:13:13 ◼   ► or, like, modern growth areas, so those big companies

00:13:16 ◼   ► will often trade some of their giant old money

00:13:18 ◼   ► for modern relevance or modern growth,

00:13:21 ◼   ► but for the most part, the kind of apps

00:13:24 ◼   ► that you and I make, the kind of apps most of our listeners

00:13:26 ◼   ► make, are probably not going to be big enough to,

00:13:29 ◼   ► or strategically important enough for most acquirers

00:13:33 ◼   ► to wanna pay a massive premium for them,

00:13:34 ◼   ► so I'm gonna be talking with the rest of this episode

00:13:36 ◼   ► mostly about, like, boring app valuations, basically,

00:13:40 ◼   ► like, how to value an app that you're just selling,

00:13:43 ◼   ► basically, just to get rid of it,

00:13:45 ◼   ► or to try to make some cash out of it.

00:13:47 ◼   ► - Yeah, and I think it's probably fair to say

00:13:48 ◼   ► that that version of selling, of, like,

00:13:51 ◼   ► the million dollars or multi-million dollars deal

00:13:55 ◼   ► to a big company is, like, it's the big fancy version

00:13:58 ◼   ► of this, but there is certainly the selling an app

00:14:03 ◼   ► for a modest amount of money for the purposes of getting,

00:14:07 ◼   ► either it's you've decided you don't want

00:14:10 ◼   ► to be developing it anymore, and it's kind of more of the,

00:14:13 ◼   ► not like a fire sale, but it's that kind of a,

00:14:16 ◼   ► I've reached the end of my interest in this app,

00:14:18 ◼   ► or I, like, a classic one where this will come up is,

00:14:21 ◼   ► so you get a, you decide you wanna go back

00:14:24 ◼   ► into the traditional workforce, like, you take a job at Apple

00:14:27 ◼   ► and suddenly you can't, you're usually not legally permitted

00:14:32 ◼   ► to continue developing an app like this,

00:14:35 ◼   ► you need to find, you're finding a home for it,

00:14:37 ◼   ► and so you're trying to work out what's a reasonable way

00:14:39 ◼   ► to value it, or, there's a much more modest version

00:14:43 ◼   ► of this, too, that is just the, I have this thing,

00:14:47 ◼   ► I don't wanna just pull it from the store

00:14:49 ◼   ► and have the value that it has disappear and evaporate,

00:14:53 ◼   ► but I can't, for whatever reason, keep working on it,

00:14:56 ◼   ► so I'm gonna find a new home for it.

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00:16:34 ◼   ► So, building on what you were just saying about

00:16:37 ◼   ► if you're just gonna go work for someone else

00:16:39 ◼   ► and you're trying to sell your app that way,

00:16:41 ◼   ► one of the most common acquisition styles

00:16:44 ◼   ► is called the acquihire, where basically a company

00:16:48 ◼   ► is acquiring your app mostly because as part of the deal

00:16:52 ◼   ► you are gonna come work for them.

00:16:54 ◼   ► This is very common for big companies

00:16:56 ◼   ► when they acquire small apps.

00:16:58 ◼   ► Big companies have trouble attracting talent,

00:17:00 ◼   ► talent is very valuable to them, so it might be worth it

00:17:02 ◼   ► if they can pay you a certain amount for your app

00:17:05 ◼   ► and as part of the deal you come work for them,

00:17:07 ◼   ► that's basically just like a big hiring bonus for you,

00:17:10 ◼   ► like that is often worth the trade off for a big company.

00:17:14 ◼   ► And oftentimes, like the acquisitions are kind of presented

00:17:17 ◼   ► in the press maybe as being something else,

00:17:20 ◼   ► but oftentimes it's really more about

00:17:22 ◼   ► the acquihire aspect of it, especially if the company

00:17:25 ◼   ► wasn't doing that well before, like if the acquired product

00:17:28 ◼   ► was not setting the world on fire, or if the big company

00:17:32 ◼   ► wants you to come work on their version of that,

00:17:34 ◼   ► so like when Google buys an email app and shuts it down

00:17:37 ◼   ► so the people can go work on Gmail,

00:17:39 ◼   ► that is very, very commonly the case

00:17:42 ◼   ► and you kind of can't think of this as like an input

00:17:45 ◼   ► to selling your app if you don't wanna go work

00:17:47 ◼   ► for a big company, you can kind of safely ignore

00:17:50 ◼   ► the goings on in the acquihire market

00:17:52 ◼   ► and the pricing thereof.

00:17:54 ◼   ► This is also very, very common for VC funded companies

00:17:57 ◼   ► as kind of a graceful PR exit.

00:18:00 ◼   ► VC funded companies don't often just fail

00:18:03 ◼   ► and shut down out of the blue, usually they get acquired

00:18:05 ◼   ► for some undisclosed sum and the people go join up

00:18:08 ◼   ► and go work for the big company, this is usually

00:18:10 ◼   ► because their investors usually have the connections

00:18:13 ◼   ► and motivation and the infrastructure set up

00:18:17 ◼   ► to easily make these kind of deals with maybe other companies

00:18:20 ◼   ► like larger companies they've invested in

00:18:21 ◼   ► or their associates or whatever else.

00:18:24 ◼   ► It's a way for investors to get kind of a graceful exit

00:18:27 ◼   ► from companies that have basically failed.

00:18:30 ◼   ► So, selling an iOS app like ours, anything less than

00:18:34 ◼   ► like a few million users is really a pretty small app

00:18:38 ◼   ► by acquisition standards.

00:18:39 ◼   ► Valuation for small apps like ours is generally not going

00:18:44 ◼   ► to be a massive amount of cash up front.

00:18:47 ◼   ► This is not like Santa Claus blessing you

00:18:50 ◼   ► with a ton of money for no reason.

00:18:52 ◼   ► You really have to look at the value of your app,

00:18:56 ◼   ► what it actually would be worth to someone else paying

00:18:58 ◼   ► for it who isn't totally in love with it,

00:19:01 ◼   ► who just is looking at it as a business

00:19:03 ◼   ► and whatever you can do with it, they can do with it.

00:19:06 ◼   ► If you can't do something with it,

00:19:08 ◼   ► chances are they can't do it either.

00:19:10 ◼   ► So, usually the most common way I've heard of

00:19:14 ◼   ► and experienced to sell an app is to basically sell it

00:19:17 ◼   ► for a small multiple of its current annual revenue

00:19:21 ◼   ► and what you expect the annual revenue to be

00:19:24 ◼   ► in the next few years.

00:19:25 ◼   ► So, you might say it might sell for like three times

00:19:28 ◼   ► its annual revenue and that's the sale price

00:19:30 ◼   ► or something like that, right?

00:19:31 ◼   ► The multiple there depends on a number of factors.

00:19:35 ◼   ► Obviously, one of the ones right up front is

00:19:38 ◼   ► how much the acquirer will need to spend to keep it going

00:19:42 ◼   ► or to build it up, to improve it and grow it over time.

00:19:45 ◼   ► If it's an app that needs a lot of staff

00:19:47 ◼   ► or a lot of server costs or a lot of other costs,

00:19:49 ◼   ► that's going to reduce the amount they can pay for it

00:19:51 ◼   ► because the acquirer will, again,

00:19:53 ◼   ► they're looking at it as a business.

00:19:55 ◼   ► They're not Santa Claus.

00:19:55 ◼   ► They're looking at it as a business

00:19:57 ◼   ► and you have to know when you're going into this,

00:20:01 ◼   ► are you actually offering them something

00:20:02 ◼   ► that's an easy business to run

00:20:03 ◼   ► or that's a low cost business to run

00:20:04 ◼   ► or is it going to be really hard for them

00:20:06 ◼   ► to extract money out of it?

00:20:07 ◼   ► Because chances are, if you couldn't make it succeed

00:20:11 ◼   ► or if you didn't feel like it's worth maintaining,

00:20:13 ◼   ► why would they, you know?

00:20:16 ◼   ► And as you mentioned before,

00:20:17 ◼   ► whether the revenue is going up or down over time

00:20:21 ◼   ► is a huge indicator for figuring out the valuation

00:20:24 ◼   ► because if it's going up,

00:20:26 ◼   ► then both you and the acquirer can make

00:20:30 ◼   ► really optimistic guesses and projections

00:20:32 ◼   ► about its future potential.

00:20:33 ◼   ► This is why you want those graphs to be going up

00:20:34 ◼   ► because you might be able to say,

00:20:35 ◼   ► well, look, it's going up clearly

00:20:38 ◼   ► and so you can pay me five or 10 times the annual revenue

00:20:41 ◼   ► and you'll make it up in like three years or less.

00:20:44 ◼   ► So you might be able to get a higher multiple there

00:20:46 ◼   ► on your price.

00:20:47 ◼   ► If it's going down over time,

00:20:50 ◼   ► then it's probably worth very little,

00:20:53 ◼   ► probably a lot less than you expect.

00:20:54 ◼   ► If your revenue's going down over time,

00:20:57 ◼   ► you'd be lucky to get like one or two times

00:21:01 ◼   ► its annual revenue in a sale price

00:21:04 ◼   ► because if it's going down over time,

00:21:06 ◼   ► if you think about it from the acquirer's point of view,

00:21:08 ◼   ► they are not only more likely to need to invest

00:21:11 ◼   ► significant resources into turning it around,

00:21:14 ◼   ► but also the investment is clearly more risky

00:21:17 ◼   ► 'cause this is a product that's already in decline.

00:21:19 ◼   ► So from an acquirer's point of view,

00:21:21 ◼   ► that is more likely that their investment

00:21:23 ◼   ► ends up being worth zero or close enough to zero

00:21:26 ◼   ► than if it's going up.

00:21:27 ◼   ► If it's going up, they just kind of hop on the train

00:21:29 ◼   ► and just keep it going and hope for the best.

00:21:31 ◼   ► If it's going down, they gotta turn it around.

00:21:34 ◼   ► And from an acquirer's point of view,

00:21:36 ◼   ► something that's going down,

00:21:38 ◼   ► no matter how much time you spent building it,

00:21:41 ◼   ► if they want to be in that business,

00:21:43 ◼   ► they could just build one themselves in a lot of cases,

00:21:46 ◼   ► and just from scratch and not buy yours,

00:21:49 ◼   ► and that actually might be easier and cheaper

00:21:51 ◼   ► than buying yours and trying to turn yours around.

00:21:54 ◼   ► Beyond that, once you actually get to the payment

00:21:58 ◼   ► negotiation of like how do you get paid this money,

00:22:02 ◼   ► first of all, quick aside on taxes.

00:22:05 ◼   ► Please ask an accountant, consult an accountant.

00:22:07 ◼   ► This is very important.

00:22:09 ◼   ► The way that your income is taxed could be different

00:22:11 ◼   ► depending on the structure of the deal.

00:22:13 ◼   ► Be prepared in your head, like when estimating things,

00:22:16 ◼   ► be prepared for it to be taxed as regular income,

00:22:19 ◼   ► which is a high tax rate, but oh well.

00:22:21 ◼   ► Be prepared for that because in many cases,

00:22:24 ◼   ► it will be, depending on how it's structured,

00:22:25 ◼   ► but please consult an accountant.

00:22:28 ◼   ► You may also not realize that in a lot of these deals,

00:22:32 ◼   ► and this is how mine have all been as well,

00:22:34 ◼   ► you may not get much or any cash up front.

00:22:38 ◼   ► I've never gotten cash up front for selling an iOS app.

00:22:42 ◼   ► Most acquirers of small apps like the kind that we make

00:22:46 ◼   ► don't have a massive pile of cash just sitting around.

00:22:49 ◼   ► Like cash is hard to come by.

00:22:51 ◼   ► It's more about cash flow usually,

00:22:53 ◼   ► especially because a lot of times an acquirer

00:22:56 ◼   ► is another indie developer or another small company.

00:23:00 ◼   ► So usually these deals are structured

00:23:02 ◼   ► with some kind of payment over time.

00:23:04 ◼   ► This could be like a fixed payment plan.

00:23:06 ◼   ► If you say like, okay, I'll sell you this app

00:23:08 ◼   ► for $500 a month for the next five years or whatever.

00:23:11 ◼   ► It could be fixed like that.

00:23:13 ◼   ► Or more commonly, I think it's a revenue share deal.

00:23:16 ◼   ► So it could be, you could say like, all right,

00:23:17 ◼   ► well you give me 25% of the revenue

00:23:20 ◼   ► over the next three years or whatever it is.

00:23:23 ◼   ► If you do the latter, if you do percentage of your revenue,

00:23:26 ◼   ► I highly suggest that you negotiate for an annual minimum.

00:23:30 ◼   ► This ensures that if they shut down the app

00:23:33 ◼   ► or if it fails or if they make it free,

00:23:36 ◼   ► if they eliminate the revenue stream basically,

00:23:38 ◼   ► that you still get something for it over those years.

00:23:42 ◼   ► And it also just kind of encourages

00:23:44 ◼   ► healthy business practices I think on the other side.

00:23:48 ◼   ► The only downside to this though,

00:23:52 ◼   ► to doing payments over time like this,

00:23:54 ◼   ► is that they're also not guaranteed to actually happen.

00:23:57 ◼   ► (laughs)

00:23:58 ◼   ► This is an eventuality that a lot of people

00:24:01 ◼   ► don't like to think about or don't consider

00:24:02 ◼   ► when they're looking at their contract

00:24:03 ◼   ► or they think the contract will protect them.

00:24:05 ◼   ► But in fact, the acquirer,

00:24:09 ◼   ► let's say you're gonna get paid over the next five years.

00:24:11 ◼   ► If the acquirer goes out of business in two years,

00:24:14 ◼   ► you don't really get anything.

00:24:15 ◼   ► You're kind of just screwed.

00:24:17 ◼   ► You might be able to try to extract something

00:24:19 ◼   ► out of the way they crashed,

00:24:20 ◼   ► but you're probably not going to succeed

00:24:23 ◼   ► or you're not gonna get enough to matter.

00:24:25 ◼   ► A contract is really not worth much

00:24:28 ◼   ► unless you are prepared and equipped to sue over it.

00:24:32 ◼   ► And most people aren't.

00:24:34 ◼   ► It's usually not worth it.

00:24:35 ◼   ► So any kind of future payment,

00:24:38 ◼   ► be prepared for the possibility that the company

00:24:40 ◼   ► either might go out of business

00:24:41 ◼   ► or they might do some kind of financial

00:24:44 ◼   ► or legal entity trickery,

00:24:46 ◼   ► like transferring assets between different subsidiaries

00:24:48 ◼   ► or things like that to get out of paying you.

00:24:51 ◼   ► So you really have to be careful who you sell to.

00:24:54 ◼   ► And anybody can be super friendly

00:24:57 ◼   ► during the deal-making phase,

00:24:58 ◼   ► but you have to kind of look at

00:25:00 ◼   ► how do these companies or people

00:25:01 ◼   ► actually do business over time?

00:25:03 ◼   ► If there's anything you can look at in the past

00:25:04 ◼   ► of what they've bought or sold over in the past,

00:25:07 ◼   ► how they've treated people in the past,

00:25:08 ◼   ► that will all help.

00:25:10 ◼   ► But ultimately, any kind of payment in the future

00:25:13 ◼   ► is merely a suggestion, not a guarantee.

00:25:16 ◼   ► And if I can summarize, I guess,

00:25:19 ◼   ► my feeling on selling apps now that I've done it

00:25:20 ◼   ► a few times is that in my experience,

00:25:23 ◼   ► the way I sell apps is not a great way to make money.

00:25:27 ◼   ► It's a great way to make a little bit of money,

00:25:30 ◼   ► but I've made more running my apps

00:25:33 ◼   ► than I've made selling them.

00:25:34 ◼   ► Selling for me is a way to make space in my schedule.

00:25:40 ◼   ► It's a way to get rid of an app

00:25:41 ◼   ► that I no longer want to work on

00:25:43 ◼   ► or I'm no longer able to work on

00:25:46 ◼   ► and then to free up that time

00:25:47 ◼   ► that that app was taking in my schedule

00:25:49 ◼   ► and then hopefully in the process of selling it,

00:25:52 ◼   ► give its users some kind of nice exit

00:25:55 ◼   ► so that I don't have to worry about

00:25:57 ◼   ► abandoning all these users

00:25:58 ◼   ► and maybe give me a little bit of cash

00:26:00 ◼   ► to help fund the development

00:26:02 ◼   ► of the next thing I want to work on.

00:26:05 ◼   ► - Yeah, and one other interesting thing, I think, too,

00:26:07 ◼   ► with selling an app, so I would prefer to say

00:26:10 ◼   ► I've never sold an app.

00:26:11 ◼   ► I've gone very far down the process

00:26:14 ◼   ► of selling an app, but we didn't end up closing the deal.

00:26:19 ◼   ► Part of what I would also sort of,

00:26:25 ◼   ► I don't know, warn people about is,

00:26:28 ◼   ► especially as an independent developer,

00:26:29 ◼   ► selling an app can be a very emotional thing,

00:26:32 ◼   ► which makes it very complicated

00:26:36 ◼   ► because the person who is acquiring the app,

00:26:39 ◼   ► like you're saying, is typically more interested in it

00:26:43 ◼   ► just as a business, like it's just an asset

00:26:48 ◼   ► that generates money over time

00:26:50 ◼   ► and they can run some financial equations on it

00:26:52 ◼   ► and kind of get a sense of what it's worth

00:26:54 ◼   ► and their goal is to profit from it

00:26:57 ◼   ► beyond what they're giving you money for,

00:26:59 ◼   ► either now or over time.

00:27:01 ◼   ► But you may have very different feelings about it

00:27:05 ◼   ► that are much more intertwined.

00:27:08 ◼   ► Like this may be, this thing that you've been toiling over

00:27:11 ◼   ► for years and years and put hours into work,

00:27:13 ◼   ► or it's the thing that allowed you to go out independent

00:27:17 ◼   ► if that's always been your goal

00:27:18 ◼   ► and you have this kind of emotional tie to it.

00:27:21 ◼   ► And those kinds of things are going to make this process

00:27:24 ◼   ► very complicated for you.

00:27:26 ◼   ► And in many ways, ultimately,

00:27:29 ◼   ► like the deal that I kind of walked down

00:27:32 ◼   ► but then didn't end up doing,

00:27:34 ◼   ► I mean, it broke down for a variety of reasons,

00:27:35 ◼   ► but one of them was this type of awkward,

00:27:38 ◼   ► this awkward tension in my own mind of,

00:27:42 ◼   ► it's like separating myself from this thing

00:27:44 ◼   ► that I care for a lot is hard.

00:27:48 ◼   ► Like the acquiring company doesn't care about that.

00:27:51 ◼   ► Like that's not valuable to them.

00:27:52 ◼   ► They're not gonna pay a premium because you love your app.

00:27:55 ◼   ► - Right, it's not their baby.

00:27:57 ◼   ► - Yeah, like they don't care.

00:27:58 ◼   ► And that's entirely reasonable and appropriate.

00:28:00 ◼   ► And if they did care, like that would be kind of weird,

00:28:03 ◼   ► but it's something to keep in mind

00:28:05 ◼   ► that it's easy to kind of think about it in the rosy terms

00:28:08 ◼   ► in theory and just focus on that.

00:28:11 ◼   ► But when it actually comes down to it,

00:28:13 ◼   ► when it actually comes down to like,

00:28:14 ◼   ► is this something that you wanna part with for money?

00:28:19 ◼   ► Like that is often going to be a somewhat emotional thing.

00:28:22 ◼   ► And maybe it's a good emotion.

00:28:23 ◼   ► Maybe you're fed up with the app

00:28:24 ◼   ► and you're just happy to be done with it.

00:28:26 ◼   ► But like, it's something that I just want

00:28:28 ◼   ► as a cautionary tale for my own experience

00:28:30 ◼   ► that it can become surprisingly emotional even for,

00:28:34 ◼   ► I wouldn't characterize myself as a particularly

00:28:36 ◼   ► emotional person, but I got fairly emotional

00:28:38 ◼   ► about the thoughts of selling off some of these apps

00:28:42 ◼   ► that I've been working on for years

00:28:44 ◼   ► and had been such an important part of my life.

00:28:48 ◼   ► It was not just a financial calculation.

00:28:51 ◼   ► And because of that, it made me realize

00:28:53 ◼   ► that I'm probably not a good candidate

00:28:55 ◼   ► for selling apps in general.

00:28:57 ◼   ► Like maybe that day will come,

00:28:59 ◼   ► but it's something that I would go into with very much

00:29:02 ◼   ► sort of my eyes open to this is a potential pitfall.

00:29:07 ◼   ► - I love that we've come around at the end of this episode

00:29:09 ◼   ► about selling apps to me saying

00:29:11 ◼   ► it's not really worth the money

00:29:12 ◼   ► and you saying it's not really worth the emotion.

00:29:15 ◼   ► - And that's, I think, speaks to who we are

00:29:18 ◼   ► and where we're coming from.

00:29:19 ◼   ► And that's probably okay.

00:29:21 ◼   ► If you're listening to this show,

00:29:22 ◼   ► selling apps for money and profit

00:29:25 ◼   ► is unlikely to be the approach you take.

00:29:27 ◼   ► And so, like maybe that's where we end up.

00:29:29 ◼   ► It's something you wanna think about.

00:29:30 ◼   ► It's something you wanna be conscious of.

00:29:32 ◼   ► But ultimately, maybe that's not for us.

00:29:35 ◼   ► - Thanks for listening, everybody.

00:29:36 ◼   ► I'm gonna talk to you next week.

00:29:38 ◼   ► - Bye.

00:29:39 ◼   ► [BLANK_AUDIO]