Valuations of a product sale


2

As a small development company we have worked on several projects concurrently using the revenue to bootstrap other projects. We now have reached a stage where we have several mature product/service streams. However we are now looking at focusing our attention to just one project and as part of this we are looking to sell of one of our projects. The project is web based software, with a relatively large user base. It's both profitable and has reasonable growth forecasts and 2 years sales figures behind it.

Customers of the software purchase a life long license, so no reccuring income from most existing users but a recent switch to offering only 1 years upgrades has not dented sales so a small recurring income per customer is likely in the future.

Like many small businesses our focus and goals change, our exit strategy never involved selling off the project but now that we are exploring this avenue we are left with a difficult issue of how to work out a valuation. This is further complicated by the fact that we have recently put large amount of development time into the project resulting in new customer niches meaning recent sales figures and potential growth figures are out of kilter with previous years sales figures.

When it comes to setting a valuation for sale rather then investment is there a standard method for valuation? and what factors should we and potential purchasers take into account within the valuation?

Financial Valuation

asked Sep 2 '11 at 09:51
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Tim Nash
1,107 points

1 Answer


1

Factors for a general sale of an established product and business model is pretty much what someone else is prepared to pay for it VS what you would be willing to let it go for.

So lets assume I'm a prospective buyer, what comes to mind?

Good points. You have an existing market and user base which could be monitiesed.

Bad points. You don't have a reoccuring revenue so your existing customers are pretty much "cost without benefit" or legacy.

Questions.

  • Have you maxed out the market or is there 90% left to take for the right investor?
  • Where is the effort? technical or marketing side to make it grow? Consistantly investing time in the market place (this costs me the a lot).
  • How hard is it to take over technically?. Is there source code to be maintained? is there specific domain knowledge to be extracted? are you going to help the buyer with these things on an adhoc basis for a year or is this hand over the money and run? All of these risk senarios are
In general...

Who is the "Natural acquirer"? Most businesses have a competitor or larger player who having that function or market base would help and be worth something to them. Generally it will be worth more to them than the average punter on the street. You have to judge this by what their motivation is for buying you ... technology they don't have is "how much will it take them to build it?", market is how much will it add to their bottom line to have access to your market over the next 2 years.

How to come to an agreed figure?

  • Basic business selling I have seen goes around 2-3 years profit + stock. Projecting forward how much will it make in the next 2 years in a good case (your uptick) and in the general case. This basically says the investor can pay off the investment in a reasonable time frame of 4-6 years if they intend to live off it as well.
  • What others could make out of it. You have a solid customer base, can the revenue model change (monthly charges for example) if so then this is a potential. Can they put advertising on the site to a targeted audience?
  • How much does the project "owe" you. Have you invested more in it than you have got back out? This is sort of a minimum.
answered Sep 2 '11 at 12:45
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Robin Vessey
8,394 points
  • It's good to see our own thoughts reinforced unfortunately you skipped quickly over the one area that I was actually looking for guidance with I realised I had accidentally left the question vague. If selling for 2-3 years profit (which is higher then most people suggest) do you sell based on predicted growth or previous sales figures? Now from research people suggest predicted growth based of previous sales figures but this prediction based on historical data is wildly out on todays figures and growth expectation. – Tim Nash 9 years ago
  • Well there are no hard and fast rules, just what I have seen with my father and other friends selling Non-IT busineses. Its what you can prove on the books, potential is just a claim ... if you think you can realise the potential then hanging on for a few more months to prove it could work in your favor. – Robin Vessey 9 years ago

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