QUESTION:
I run a small FB app that is getting a bit of attention, and I’m constantly being emailed asking if I’d like to sell. I don’t want to at present. I am really loving building it up,
and I know it will grow fast and be worth a lot (well, I hope). Either way, how does it work? A couple of people have asked about investment, and I honestly don’t know how it works. What does one do in this situation? How do you know what your app is worth? What are the ups and downs of investment versus outright selling, and what if they want
you to stay on?
ANSWER:
Naomi Kokubo
by Naomi Kokubo, Cofound of Founders Space
That’s a nice problem to have. Here’s what I can tell you. If you’re enjoying building up your business and you feel it can be worth a lot more in the future, then don’t sell. For a company like yours at this point in time, there is no clear valuation. It’s worth whatever someone is willing to pay for it. Once you start to become profitable, you can estimate the value as a multiple of earnings. But that’s probably a ways down the road for you.
As for investment, you should talk to an experienced corporate lawyer before considering any investment opportunities. First, you need to make sure your company is structured correctly. Second, you need someone to negotiate the deal on your behalf, and you want someone who has done this many times before.
As for your last question, most investors and buyers will want you to stay on. But this isn’t always the case. It’s negotiable, and you can discuss this with them and come to an agreement in advance that suits both parties.
I hope this helps!
This is an interesting question, and one that many indie developers have faced with the rapid explosion of app platforms launched by Facebook, Apple, Google, Amazon, and a number of others. It is a question that we at Apptopia have spent months improving our answer to as more comps (comparable transactions) have become available.
Naomi is correct in saying that they are worth what the market will bear, but that is definitely not the whole answer. Since the transaction volume is quite low still (there have been a few thousand app acquisitions to date out of a total pool of over 2 million apps on Facebook, iOS, and Google Play), the comps need to be selected and used carefully. As a general trend, from the perspective of earnings multiples, apps have fallen largely into the same category as domains, which generally sell for 8-12 months of earnings. Of course, depending on whether your app has been monetized effectively, this number may not be reflective of actual value, especially if you are looking at a big fat zero for monthly earnings. When valuing an app that is not currently being monetized, a multiple can be applied to the projected monetization were ads and IAP integrated. When estimating monetization, it is important to research the average eCPM numbers based on the particular platform and category of your app. In addition, my general advise when working with developers who are estimating the monetization potential on an app is to always assume that introducing ad support will impact your active user base.
This number is further impacted by a number of other metrics. An extremely important metric is the trend in earnings/users/etc. Like any investment, an app that is quickly losing traction will be discounted, while one that is experiencing a period of rapid growth can earn a significant premium on the basic multiple. It is important to recognize, however, that selling an app is not the same as selling a business. Keep in mind that unlike an acquisition, which involves the purchase of both an organization’s assets and staff, this is simply an asset sale.
What a fantastic response, Naomi! Thank you so much! I’ve been wondering about where to start for some time!