Acquisitions · Exit Strategy

How do I price the transfer of a venture that I no longer want to persue?

Daniel Gauci Solving problems with next-generation cloud software

Last updated on September 6th, 2017

I have been working on a product for the last 3 years but am now moving away from it. The product has been shaped through heavy interaction with customers and it is working well for them. The product currently has zero marketing and all customers were referred by word of mouth. I do see promise for the idea but I am too time poor to execute it.
One of my customers is very interested in owning the product and taking it to market themselves but I have no idea how to price the transfer based on the value below:


The product:

  • SaaS application (multi-tenant).
  • Monthly subscription fees bring in around $600 a month.
  • Cloud hosting costs ~$140 a month.
  • Feature set devised while working with customers from beginning.
  • Current usage does not exceed 15 concurrent users.
  • Load tests shows solution should support 70 concurrent users without increase of monthly hosting.
  • Multilingual/localisable user interface.

Solution specs:

  • UI:
    • Angular JS
    • Heavy client caching to reduce hosting costs
  • Backend:
    • Web API
    • Hosted via an Azure WebApp
    • Simplistic PaaS approach to reduce hosting costs
    • Application autoscales based on load if required

The business:

  • Continuous delivery:
    • Entirely automated.
    • Push of new code triggers automated deployment to cloud.
    • VSTS to manage CD and backlog.
  • .AU and .COM domains.
  • 120 users across 3 customers with most being daily users.
  • Automated monthly billing implemented.
  • Google Apps for email, document storage etc.


I am an experienced software consultant who is very familiar with best practice across the Microsoft stack. The value that my customer will be getting is of a high standard and not a backyard job. The necessary measures have been put in place to allow for:

  • Easily onboarding future developers
  • High amounts of load on application once taken to market


How do I put a monetary value on transferring ownership of the above?
My customer has offered me $25-30k with a possible stake in the business if I play a CTO-ish role but this kinda defeats the purpose of my exit.


Any direction would be greatly appreciated as I am not even sure if my initial approach is correct.


Thanks :)

Raymond Williams Software Developer at Vista Entertainment Solutions USA

Last updated on September 6th, 2017

This can be a very difficult question to find an answer for and, unfortunately, most people in similar positions attach emotion to this number, making it unrealistic.


The best answer to price you venture would be, the highest price someone else is willing to pay for it. If no one will buy it, then it is worth $0. In your position, where you have a potential buyer, then the best price would be the the higher of these two: the price you're willing to sell, the price the buyer is willing to pay.


Ok, that aside, let me try and price your venture just so I can throw in a number.


I heavily disagree on there being a 'normal going rate for a startup'. If there were, it would be $0 because the majority of startups fail. Each startup is different, but we can find a few aspects that help with a price tag.


Two common aspects for valuation are:

- Monthly revenue multiple

- Price per active user


  • Monthly subscription fees bring in around $600 a month.

This is your best number for valuing your company. At this size (extremely small) you'd probably get 5-10x annual revenue multiple: $36k - $72k


Higher growth rate = higher revenue multiplier.


  • Price per active user

It seems like you have a low number of users, so this method may not be favorable. You'll need to calculate your Customer Lifetime Value (CLV) and then multiple that by your paying users + expected users over the next 12 months.


CLV x Paying Users (+ expected 12 month change) = price of your company


Unfortunately, the other details do not impact the value of your company significantly. They may increase the potential pool of buyers willing to buy your product, but not really adding $ value to it.


For example:

UI:

  • Angular JS
  • Heavy client caching to reduce hosting costs

This adds little to no dollar value

Sune Gynthersen Just looking around...

September 6th, 2017

I'm no expert on valuation, but I'll add my two cents anyway.


Price: $25k

Earnings: $5.5k


P/E ratio: 4.5


Caveats: The earnings you mention does not account for the current cost of on going support/ops-work?


My intial thought on the P/E ratio, is that this is a good price for the buyer, especially since this is before considering the possibility of selling subscriptions to a wider audience.


If I were to put my own money in something like this, it would come down assessing the quality of the code as well as the the scalability of the idea and infrastructure.


With a P/E of 4.5 it seems like a bargain, but since the absolute numbers are relatively low, even a bit of ongoing ops-work could eat away all the current earnings.


I hope this gives some perspective,

Sune

Danny van Rijn CEO, psychologist, enthousiastic, Lean startup expert, passion for making people learn

September 6th, 2017

The normal going rate for a startup is about $750.000. However, if you are able to prove your "TamSamSom" you might be able to value your company more accurate. I use lean startup as a method to do so.


The easiest way to do this is simply by making a Facebook ad that links to a landingpage and see:

1: How many potential users your product would have. So just make a specific target audiance within your ad and see how many people fit the description.

2: How many people click on your ad. More specifically the clicktrough ratio.

3: How many people click "buy" or "more info" on your landingspage.


Now you know more about the (potential) value of your product/service.


Hope that helps