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.
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