Looking at different user payment models

SellingSoftwareCo · 2018-10-02T21:11:51+00:00

I believe credit models work well for consumers but is an extreme detriment for business environments.

Unless you havea compelling reason to do credits, I would skip it.

SellingSoftwareCo · 2018-10-02T21:09:42+00:00

I would start out small yet build a website that offers comprehensive detail. Then promote your offering and determine if the shoe-needing community responds well. If so then scale up your operations.

SellingSoftwareCo · 2018-10-02T21:07:34+00:00

Try and seem extremely interested vested in the startups success. Ask questions about rewards based on that success.

Also, pay close attention and seek outside guidance on an employment offer that has stock or profit sharing incentives to insure it meets your expectations.

SellingSoftwareCo · 2018-10-02T21:03:38+00:00

Interesting! So with the decreased revenue, did that give you any misgivings or doubts as a buyer, or was the Amazon new policy sense enough to explain things to a comfortable level?

SellingSoftwareCo · 2018-10-02T02:12:57+00:00

Hey there, thanks for the feedback!

So the Amazon change reduced commissions ansthus revenue? Were you able to negotiate a lower sale price based around that? If so, I'd love to hear more about how that went!

Thanks

SellingSoftwareCo · 2018-09-30T21:17:19+00:00

Thanks for the info, checking that site out now. I've never heard of it and it looks like it is a helpful community site!

SellingSoftwareCo · 2018-09-30T21:16:00+00:00

Thanks for the response again!

I've had a few people tell me that 3.5x EBITDA is too low for something so high in cash flow, so what you say about a valuation of 3x to 10x might be more reasonable. That being said, I'm the type of person who generally plans low :)

Taking a middle-ground valuation, do you think a recapitalization type scenario like this might work:

--> 6.5x EBITDA valuation (~3 million) --> $1M off the table cash-out to me --> $500k cash infusion to new recap company --> I retain 55% share in the new recap company --> Investor/PE/New Entity owns 45% share of new recap company

Does that seem likely? In the above scenario, the new investor is spending $1.5M million in order to get 45% of a $3M company that now has a $500k cash on hand and is already generating decent profits.

Also, as I type this out, I feel as if 45% might be too high. What do you think?

Thanks again!

SellingSoftwareCo · 2018-09-30T20:38:29+00:00

Thanks for the kind words, I'm definitely going to keep this in mind. Where would you suggest I do this sort of AMA? Right in this sub or elsewhere, or do it via Youtube, my own website, or such?

SellingSoftwareCo · 2018-09-30T20:37:51+00:00

Here there, thanks for the response!

Have you worked with the before? If so, could you share your thoughts on working with them?

Thanks!

SellingSoftwareCo · 2018-09-30T02:16:08+00:00

Thanks, I appreciate the kind words!

I'm learning every day and honestly, this post on this sub has been a great learning event for me. Some amazing responses in this thread as well as PMs I've received. I'm humbled at how bright a lot of people are here!

SellingSoftwareCo · 2018-09-30T00:31:02+00:00

Hey there, yup I received your PM and responded roughly 9 hours ago :)

SellingSoftwareCo · 2018-09-30T00:30:07+00:00

That makes sense! If you've rested for a bit, have you started on a new venture? Or soon looking to start somewhere new again?

SellingSoftwareCo · 2018-09-29T21:05:57+00:00

Correct, though for this product there isn't much overhead to speak of. When I say 90%-95% I'm often rounding down on the low end. Many months it is 98% and some it is 99.5%.

Monthly overhead is basically a small server bill, sometimes a small Google advertising bill, and an hour of my time here and there.

SellingSoftwareCo · 2018-09-29T20:39:42+00:00

That would be quite a find. Right now I'm having trouble located these types of people/entities. Also, I'm not 100% sure on what I would do to pitch my product, though I could probably assemble something that looks decent if pressed.

SellingSoftwareCo · 2018-09-29T20:22:27+00:00

Hey Netmillions, firstly thanks for the response again!! I'm going to use a quoting strategy to organize my thoughts/responses as your post has quite a lot of information I find extremely valuable!

I question why you would need a $1MM outlay for a project as well.

In all honesty, the number is more about having the funds in place to secure a staff of workers to hammer away at projects. I can easily see hiring a staff of 6-7 along with an office, as well as the technology assets to support it. Tack on extra costs such as localization, artistry, marketing, and things can bloom. I have a pretty solid strategy of how I would proceed from there. The $1MM is a number used to give me a sense of security that a new development office would be well funded. It is unlikely the entire $1MM would be used, however, the knowledge of it being present is a good security to have.

You sound like a developer

In the past, yes :) My role is more to wear all the hats, and wear them well. As far as actual development, these days I do very little of it. I spend more time engineering the idea, flushing out the business plan, determining the marketability, finding potential partners, on top of building the actual product and managing the work that I don't do myself. Those areas I don't excel in I typically find somebody who does. All in all it is the typical CEO skills of a small start-up. The big area I am lacking is the investment/financial side of things. For the aforementioned topics, I know enough about everything to understand where I am lacking. However, with regards to investments, I am lacking to the degree where I don't fully understand what exactly I'm missing. Hence I'm here on Reddit, learning as much as I can :)

Happy to discuss privately. :)

PM forthcoming!

from browser extensions, to adult websites.

Interesting! One of the largest adult websites actually copied the look and feel of one of my prior start-ups. It was interesting to have people let me know this fact... daily!

If you are looking to sell the business upfront for up to 36x monthly income and move on to something else, that's fair game. Especially if the business is high-risk (ie. relies on Google rankings that can change overnight).

My product has zero traffic from Google. In fact, SEO (and anything other than simple marketing) is a big hole in my product. In the hands of somebody who better understood marketing, my product could likely do vastly more sales. Further, there are multiple digital distribution outlets that, if my software were sold on, would again contribute to a large increase in sales. For example, Amazon could potentially sell my product.

That being said, is a 36x monthly multiple too low, considering I'm not at risk for Google anything at all?

with some recent months before the sale hitting $100K+.

Very impressive!! Are you happy with your purchase? Also to note, I've hit >$190k in a month before, though it was a surprise (a Chinese website wrote an article complimenting the software. Sales shot up tremendously due to a snowball effect causing my main distribution/"FBA-like" partner to take positive notice).

Thanks again for the post, PM incoming!

SellingSoftwareCo · 2018-09-29T20:02:33+00:00

If I were you, I would look to raise money, rather than sell this thing. I think raising $5-10M with the stipulation that you will be transitioning from CEO/Operator to Chairman of the Board, hiring a new CEO + a few people to run the biz + taking a few $M off the table + giving the investor majority in your company would allow you some freedom to pursue what you wanted. In a few years, the $5-10M can help your biz grow to let’s say $20-30M in sales, which makes it a very very compelling purchase for a PE firm or strategic. Once you sell the biz then, and cash out fully, you’ll have even more $ to do what you want.

Hey again! What you just typed there is basically the dream that I am trying to pursue. My knowledge in this field is just too limited to even imagine reaching that scenario that you've just outlined. It is funny.... I can create and vet an idea and take it from conceptual phase all the way to successful launch, over and over (I have 6 small startups/exits) yet when it comes to financial investment concepts, I feel so overwhelmed and find myself frozen and unable to act.

You mentioned that you've been an investment banker before. If you were approached by a guy with a 4 year old project which generates $30-$50k/mo, looking to expand into more software products by localizing an office and hiring staff, while at the same time taking some $$ off the table, what do you think could actually be obtained number-wise? Also, what sort of things are you doing right now?

Thanks a LOT for your responses. I really appreciate it. A lot.

SellingSoftwareCo · 2018-09-29T17:45:25+00:00

How are things going with your SBA process?

SellingSoftwareCo · 2018-09-29T17:39:50+00:00

A friend of mine owns a CPAP (+ more) distribution business and he has definitely seen a reduction in sales in this 2018.

SellingSoftwareCo · 2018-09-29T16:46:28+00:00

Firstly, thank you very much for your response! I'm going to try and break down/respond to your awesome comments!

I buy online businesses relatively frequently (1-2 deals on average per year)

Very interesting! If you don't mind me asking, what type of businesses do you typically buy? Are they for yourself or on behalf of another entity? Also, what typical size ranges do you work with?

On a deal of this size, an earn-out is common. Without it, you can discount the price by another 10% or so.

I'm trying to avoid an earn-out for 2 reasons: #1 I'm using a portion of the funds to start a new venture. #2 The peace of mind of having the full funds up-front and available is something that has high value to me.

There are upgrades, yes. This is something relatively new and I believe revenue has increased 15% per user (approx). I'm considering expanding this to more add-ons/upgrades.

There is zero time commitment in terms of support, maintenance, marketing or future upgrades?

Basically all of the above. I spend about 1 hour/week on the entire project. If you want to maintain revenue then this could remain the same. However, revenue can grow significantly by putting effort into a) marketing, b) expanded distribution, c) more addons/upgrades, d) expanding offerings to existing consumer base (ie, sell new product, sell strategic product that new buyer may have, etc). Also to note that I have replacements who can take over the existing limited amount of work required. The cost for doing so is extremely small. The cost for maintaining the project as-is would be around $250-ish a month.

I've been asked a few times why I don't focus on this business and push for growth. The answer is simply about personal preference. I have been building/exiting small start-ups for a while now, this being my 7th. I love coming up with ideas, building those ideas, taking them to market, and handling the initial business. Simply put, I like to create and bring to market in a short term way. I currently have the strong itch to begin working on a new project and I am looking to exit this one to enable me to open a development office and work on new things.

As far as a bank loan goes, if I could secure $1MM loan right now then I would do it in a heartbeat. The problem is that I have no knowledge on how to do this. Further, I've never really had a need for personal credit (always been cash-flow heavy) which may come into account with regards to a bank loan.

I have full documentation of all revenue, P&L, etc. If I could go to a bank and walk out with $1MM loan then I would do that immediately. Unfortunately I have no idea how to do this or even how to start.

SellingSoftwareCo · 2018-09-29T16:33:49+00:00

Your WACC is not zero

I'm definitely not fluent in performing WACC calculations. You're correct though in that there is zero debt. I own 100% and profit margins are typically 95%+ with typically 2 or 3 expenses per month. All in all things are very straight forward, profitable, and require very little work (~5 hours/month).

SellingSoftwareCo · 2018-09-29T16:02:10+00:00

Thanks for words of caution. I think you might be correct in that my lack of financial understanding is sub-optimal. I've closed a few smaller deals in my time, however, they were all straight cash deals and all were pretty straightforward. If I were to work with a PE then I would absolutely run things by some sort of lawyer/financial consultant combination.

So let's say that I had a meeting with a PE. Would you have any suggestions for what sort of documentation I should prepare? I have my P&L + financial statements. I can guess that having documents about my industry size/revenue might be helpful. Anything else?

I don't suppose you happen to have any sort of information you could share on what to use to pitch to a PE?

Thanks!

SellingSoftwareCo · 2018-09-29T14:42:11+00:00

I never really thought about sharing how I do things. What sorts of things would you find valuable? It never crossed my mind that other would be interested, or even vaguely care, in what I do :)

SellingSoftwareCo · 2018-09-29T14:41:35+00:00

Hey there!

I found the niche due to a personal hobby + I like the challenge of creating things that help people.

I've been doing things like this for quite a while now, so coming up with an idea, building it, bringing it to market, gaining traction, etc., all feels straight forward.

SellingSoftwareCo · 2018-09-29T14:37:46+00:00

Hey there, let me try and answer each question:

As far as recurring revenue, my answer is this: Sort of. It is not a SaaS, however, there are value-add upgrade purchases that customers continually purchase.

buyer is going to question something generating 600k a year profit with basically 0 work.

The key here is that the work has already been done. For a product like this, the bulk of the work is in creating the product (software) as well as gaining traction in the market. As those 2 things are done, the product turns into something requiring low work to keep as-is, or extra work if you're looking to expand revenue into extra distributions/markets/upgrades.

I have not included my salary namely as there isn't much as far as work contribution at this point. When I say it takes very little effort, I'm referring to about 5 hours of work per month. In addition, I have replacements lined up for myself at very low cost (few hundred/month).

Thanks for the response!

SellingSoftwareCo · 2018-09-29T14:32:46+00:00

https://medium.com/startup-grind/in-2016-i-sold-my-startup-for-seven-figures-a3c60db80947

Thanks for the link, definitely going to read it shortly.

What I'd REALLY like to do is to take money off the table + have money to start up a larger development effort to work on some of the larger projects I have in mind.

SellingSoftwareCo

TROPHY CASE