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Ask HN: Selling my first company - need help with the process

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Re: Ask HN: Selling my first company - need help with the process

#21

Post by dropkick »

A few years ago, I wrote a commercial plugin for a product and later sold the IP to the developer of the product I plugged in to. I'm intentionally being as vague as possible to remain anonymous.

My plugin was on the market for about 9months. In that time, my revenue was in the $60k range. The sale price was around 6x the revenue. However, it was spread out over a few years of me being employed by the purchaser. Of course, I got a nice salary in addition to the purchase price.

One thing that made my situation interesting is that a competitor of the product I plugged in to was interested in me doing the same thing for their product. Once they got wind of the negotiations, they immediately made me an offer. It turned into a bidding war for my IP/company.

My observations from what you've described:

you will almost certainly be expected to work for the purchaser since it sounds like you are the sole developer. They are essentially buying your services and the IP. So don't give them a reason to be wary of you working for them.

On what to ask for: Unless you have revenue, there is no way to objectively quantify at least a minimum value of your IP. There is an art to negotiation that is beyond this post but you've already got them to admit that you will make them millions. I think that is an excellent start. The best negotiators are willing to walk away from the deal. Determine a minimum you want ahead of time and then be prepared to walk away if you don't get it.

If you just want out then act accordingly. Give them a price that you know will keep them interested.

In my case, it took several months between the initial exchange of interest and serious negotiations to begin. They first contacted me in January, An email with an offer price arrived out of nowhere in May.

What I would do differently:

I would have asked for an earn-out instead of a flat price. I didn't know about this until I talked to a few other entrepreneurs. Basically, you give up guaranteed money for a cut of the action from your IP. You're assuming part of the risk. Big company with big marketing budget drives your product to success and you get a cut. It's a very common thing in product acquisitions.

When the competitor made an offer, I disclosed the other company's offer. I should have let them make me an independent offer. Even though there was a bidding war, the price stayed pretty close to the initial offer by the first company.

Re: Ask HN: Selling my first company - need help with the process

#22

Post by dkersten »

kirse wrote: post #15
inboulder wrote: post #10

Earlier quoted context omitted.

"This is really just a myth. If you present a buyer with well-justified and thought-out reasons for your number, it's going to be hard for them to counter-offer with something ridiculous, unless they're just being an ass" Wrong, you're missing the point entirely, I'd like to buy a business from you... The point is that if you offer a price first, this is the HIGHTEST the buyer will pay, he might have valued the busin…

In my deals, I usually take $Well-Justified-Price and then tack on $Extra to swing the deal far in my favor. Usually $Extra brings the price close to where I think the buyer would walk away. You must have missed this. If a buyer is willing to pay my seriously inflated price, then I think I'm making off like a bandit and the buyer thinks they're getting a discount (assuming they were going to offer more than my inflat…

If you won't be happy with $Well-Justified-Price + $Extra because you feel they may have offered higher, then either your $Well-Justified-Price or your $Extra is too low, since you obviously wouldn't be happy with that amount anyway. If you feel the real $Well-Justified-Price + $Extra is higher than what they'd pay, then obviously you're not going to be happy with any outcome, so why are you wasting your time on this deal? The whole point of $Well-Justified-Priceis that its a good amount that you would happily walk away with and $Extra is exactly that - an added bonus. If they would have paid higher, good for them, they've got a discount, but you just walked away with an amount you decided would make you happy PLUS an added bonus.

Don't worry that they might have offered more. Be happy. If you can't be happy with that amount, you did the find a price you'd be happy with part wrong.

(Obviously not directed at parent, but rather agreeing with parent)

Re: Ask HN: Selling my first company - need help with the process

#24

Post by joelhaus »

First off, congrats on getting this far! Regarding your questions...

1) Price tag - There are three approaches you should consider:

  a) Income - knowing the bottom line revenue 
  add should be very helpful. If they are a public 
  company, you should also be able to determine 
  their weighted average cost of capital (if not 
  public, you could try estimating it). Using these 
  two figures, you should be able to come up with a 
  fairly solid price using DCFs.

  b) Replacement - what would it cost them 
  (time + money) to build this from scratch?

  c) Comparable - is your product unique or do 
  they have the possibility of shopping around 
  for a competitor at a lower price.
2) Legal requirements - Find an attorney that specializes in contract law and IP. If you can't afford one, you might be able to find someone willing to work on contingency.

3) Other considerations - see #2 above and do this before anything else. Grellas, a contributor on here, probably isn't a bad place to start. It also wouldn't be a bad idea to have a fall-back plan if the deal falls apart; you'll alleviate a lot of the pressure during negotiations.

Good luck!

Re: Ask HN: Selling my first company - need help with the process

#26

Post by staunch »

Name a price that you're happy with + 75%. Justify it as best you can (good arguments will be repeated internally). Let them talk you down a bit, if they want. Be prepared to truly walk away. If they offer your price + something then take it and be happy -- sign on the dotted line.

Re: Ask HN: Selling my first company - need help with the process

#27

Post by user2newyork »

dropkick wrote: post #21

A few years ago, I wrote a commercial plugin for a product and later sold the IP to the developer of the product I plugged in to. I'm intentionally being as vague as possible to remain anonymous. My plugin was on the market for about 9months. In that time, my revenue was in the $60k range. The sale price was around 6x the revenue. However, it was spread out over a few years of me being employed by the purchaser. Of c…

Thanks for the details. Pretty awesome. Yes I am a sole developer just like you.

Re: Ask HN: Selling my first company - need help with the process

#28

Post by chengas123 »

inboulder wrote: post #12

From reading a lot of VC blogs, the thing that affects their valuation the most is competition. I think the most important thing you can do for your deal is get a competing bid of some kind, any kind, any outside interest at all will do more for the price than you can do within the confines of the deal with company x. This may sound difficult and it is, but I think it's absolutely critical.

Yep, the two most basic things to do in any negotiation are start high since the price will only be negotiated down and develop your BATNA (best alternative offer).

Re: Ask HN: Selling my first company - need help with the process

#29

Post by user2newyork »

donw wrote: post #6

Is the product currently generating revenue? If so, at what percentage of the amount that the buyer thinks it will add to their bottom line?

No I haven't released the product yet. Buyer has the revenue with a product which my product complements.

Re: Ask HN: Selling my first company - need help with the process

#30

Post by gojomo »

Get a good business laywer. A lawyer can help with both negotiating strategy and structuring the deal. If for company X your product will really make them $Y million/year (Y>1) then the size of the deal is large enough to make getting professional help worthwhile, ASAP.

Two key factors influencing their willingness to pay:

- the net-present-value (NPV) of all expected future profits from your program. If they've already accepted a estimate of $Y million/year for N years then assume a 'discount rate' and the NPV formula pops out a number. (Note that the 'discount rate' assumed for evaluating risky investments will be larger -- perhaps much larger -- than the similarly-named 'discount rate' used between banks.)

- their best-alternative to a negotiated agreement -- aka their "BATNA" -- be it some competitor's software, or an in-house development effort, or whatever.

Neither of these alone consider risks -- upside or downside. (What if it's way more than $Y million in subsequent years? What if a few years in a much better and cheaper competitive offering becomes available? What if they think they can develop it for $Z but it winds up costing 10X more?) But they provide a vague window for possible prices.

These of course work in exact reverse as they analyze what price you'd be willing to sell for. How much would you make in the alternative? What are your other options (such as other bidders)?

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