We just sold DropSend, a little web application that we built some three years ago. Basically, the app enables users to send large files easily, rather than emailing them. It’s been profitable from the start, but I decided to sell it to concentrate our resources on other areas of our business. I learned a few painful lessons during the process of selling DropSend. In this article, I’m going to share a few of those tips with you so you can avoid some typical (but not always obvious) pitfalls should a buyer come knocking.
Choose your merchant account carefully
One of the hardest things about selling a web app with paid subscribers is handing over the merchant account. You will have to change your web app’s billing system to work with the buyer’s merchant account. Keep in mind that the instant the sale completes, all new invoices will have to be paid into the buyer’s account.
The most important thing to remember is that this process takes time. As soon as you’re sure the buyer is moving forward, start working on this. You don’t want this to hold up the sale. Also, choose the biggest, most prevalent merchant account provider you can; if you get lucky, the process could be much more streamlined.
Make invoicing as simple as possible
The buyer will want to easily integrate your app’s billing system with their accounting system. Therefore, it’s important to use a system that is quite common so that it will integrate (fairly) painlessly with your buyer’s accounting system.
I recommend having your invoices emailed to your bookkeeper/accountant on a weekly basis, as a .CSV file. This can be imported by most of the common bookkeeping programs like QuickBooks.
Expect $20,000+ in lawyer and accountancy fees
There’s no way around it: you’re going to spend a fortune on lawyer and accountant fees. We spent around $20,000 and the DropSend acquisition was very straightforward.
The lawyer’s fees were roughly $14,000 and the accountants were around $6,000. You don’t want to skimp on these, though, otherwise you’re just asking for trouble later.
Pay attention to your admin area
One of the first things your buyer will want to know about your app (after the standard financial questions) is how to answer your customer’s support questions. And one of the most common support questions is refunding people’s money. Therefore, make sure it’s very easy for you to refund customer’s money.
You want to be able to search for a customer, view their invoices, and click one button to refund an invoice (of course, this helps your support staff, too!).
In addition to refunding invoices easily, you want to make it very easy to reset people’s password. It’s very common for people to have trouble with their passwords and you want to make this as easy to reset as possible.
Observant readers will have noticed that some of these tips are things that you really should be doing anyway; they’re not just useful when selling your app.
Take the cash
Initially a buyer offered to pay with stock. We decided to turn this down and I’m glad we did. When taking payment in stock, you’re subjected to market conditions (not great right now!) and things that are out of your control. If possible, always demand cash.
Expect staged payments
The buyer will usually pay 50% on completion (signing) of the contracts and 50% on successful transfer of the domain name(s). Make sure to start the domain transfer process the moment the contract is signed.
Make it easy to prove your revenue
The buyer will ask you to prove that you are receiving the amount of revenue that you reported to them. The usual way to do this is send a faxed copy of your bank statement, so a separate account for your app makes this a lot easier. The buyer will need to match up deposits in your bank account with the revenue you’ve reported. Any discrepancy and you’re risking the deal falling through.
Do some serious tax planning
Thankfully you’re going to be making a large amount of cash. Unfortunately Mr. Tax Man is going to want his cut. Do everything can to structure the deal so that you avoid over-paying on tax. There are many completely legal things you can do so talk to a very experienced accountancy firm before you sign any contracts. In fact, it’s probably worth talking to to a specialist before even starting down the past of selling your app, because structuring the deal may take time, particularly if you need to get approval from a body like the the Inland Revenue or the IRS beforehand. These high-flying accountants can be expensive but they are worth every penny.
Don’t blog about it (duh)
I made a mistake early on: blogging about our revenue, costs and selling price. I thought it would create more interest in the sale and therefore drive up the price. I was completely wrong. It scared away everyone who was seriously considering buying DropSend. Don’t do it: serious buyers don’t like it, because they don’t want that information available to competitors after the sale completes.
Expect to devote all your time to the sale
You’re going to be sending and receiving hundreds of emails and making a ton of phone calls leading up to the sale. I’d recommend that in the final month of the sale, you will have to spend close to 100% of your time on the sale. Make sure to allow time for this as taking your eye off the ball could result in slipping up and causing the sale to fall through.
Be discreet
As you put your app “on sale”, the price drops: you lose the upper hand. Discretion is the better strategy, if you can get the word out to potential buyers that you might be open to offers without putting your app “on sale”. We got lots of exposure from a TechCrunch story about the sale, but in the end I don’t think this helped us get a better price for DropSend.
What are your tips?
Hopefully those simple tips will help you avoid some common and painful mistakes. If you’ve been through a sale yourself and learned any other lessons, please share them in the comments.
Like this article? Check out Ryan’s Startup Clinic on Fri, Dec 12th 2008 in Bath, UK
Interesting article Ryan; particuarly your point about not blogging about the sale. That point is interesting to me as it was that very action that brought you and your company to my attetntion. It was such a radical thing to do it made me sit up and take notice.
Having said that I can see why you advise against it; I know I’d be very quiet about my sale.
David Hughes
Some useful information in there for people selling an app and even currently running one, I bet most do not have as many background features which could make their lives a lot easier.
Awesome Ryan - this is the honesty and openness that I’ve come to expect from you. Glad to see you’re sharing it with everyone like this! Awesome information and it really helps shed some light on the often hush-hush practice of selling an app.
One question I have, any advice on how to know when you’ve found the right buyer? Was it a gut feeling as well as factors like cash, amount, and ease of sale? Or was it more calculated than that for you?
Great article! I dugg it for you, because I think a lot of people can benefit from this. Thanks for taking the time to write on this topic.
What accounting system did you use to structure your accounts the way you’ve explained above?
@Daniel - I spent a ton of time on the phone with the buyer before we proceeded. It took time, but in the end I knew I could trust him. Ironically, we’ve still never met in person!
@Shashank - We use QuickBooks
Can you talk more about what the Lawyer and Accountant fees were specifically for?
MY BIGGEST ADVICE : Have more than one buyer! When selling my company, I had 3 buyers that were all willing to pay in the same ballpark. Whenever my top choice gave some term I didn’t love, I was able to sincerely walk away. Of course, each time I got my way because of it.
Always have more than one seller. When one expresses interest, contact a few other choices to let them know the other is interested and you wanted them to have a fair shot.
Very good post Ryan - you don’t see too many of these and all very valid points.
Agreed with Sivers.
But if the lawyer’s fees were roughly $14,000 and the accountants were around $6,000.
I hope you sold for more than 20 times those fees.
Thanks for this post Ryan.
Yes, very good post.
Lots of common sense points, like making sure you can transfer the user payments fast enough to the buyer, keeping proper accounts, tax issues, etc. - but as Voltaire said, “Common sense is not so common”.
Some of these things can only be learnt by experiencing them - or if someone like you takes the trouble to post and share with others. So, thanks!
- Vasudev
Also in terms of the lawyer and accountant fees, were those the total fees for both sides or just yours in the sale? Do those get recovered in the sale price or does that just get cut out of your profit. Great article, gave some good ideas even for those not looking to sell.
What suggestions do you have for actually finding buyers?
I agree with a few others: the lawyer and accountant fees seem excessive.
Very handy article Ryan, and much appreciated.
I am wondering though - before you decided to put DropSend up ‘for sale’ - did you ever get many unsolicited offers of interest to buy your company?
I am just curious as to the best ’stealth’ approach to discreetly advertising your business for sale. Would you recommend actually approaching your competitors in the marketplace?
@Richard - Those were the fees for just our side, and they were taken out of the profit of the sale.
[…] Vitamin Features 損 Sell Your Web App: Lessons I Learned From Selling DropSend[運営ノウハウ] […]
[…] Vendere non è come produrre: se poi si tratta di un’applicazione web ci possono essere problemi che solo l’esperienza insegna a superare o evitare. Ecco dunque che questo articolo di ThinkVitamin può tornare molto utile in questo senso, raccontando il caso reale della vendita di DropSend da parte dell’autore. […]
[…] In our next news item Ryan Carson, owner of Carsonified, has this week published a blog entitled “Sell Your Web App: Lessons I Learned From Selling Dropsend” and as you would expect from that title he shares his tips and mistakes when selling his app and it’s a very interesting read. […]
Ryan, good article, but you just made another crucial mistake. NEVER EVER use words “serious tax planning” in connection with your transaction. The purchaser will probably slap your face when they see this. The taxman may stop by to collect some additional tax+penalty after seeing this. This remark may well cost you/purchaser lots of $$$, etiher on tax+penalty, or in best case only on increased advisers’ fees when you/purchaser will defend the position. You need valid business reason for every single step to prove it’s not tax driven, even if it’s legaly perfectly valid.
What about the little guys? I run a profitable site in my spare time and am ready to sell to an interested buyer–I basically basic: homemade invoices, sole proprietor for taxes, no lawyer… Can I expect a handshake deal?
I’m interested in any advice for @Chris re the little guys.
I agree with all your ideas in selling apps but the legal fees seem a little high
Very insightful article Ryan, Thank you.