What it's like buying a $128k side project
blog.codetree.com
blog.codetree.com
A few questions:
Is it common to have to fork over all cash for these sized deals? Is it possible/acceptable to finance? What alternatives to seller financing have you seen? I don't imagine it's possible to just waltz into your local bank and say hi guys I need $100K to buy a website!
I'd be interested in learning more about finding these deals. You found this one through FE. Are there other common places to find tech listings? Do you ever approach companies that you like but aren't actively looking to sell? I'd love to see a play by play of how one of those conversations go.
I've discussed this with my local Belgian bank (well, not $100k, closer to $1-1.5m), and they'd be happy to do it if I put up 25-30% of the capital. So should definitely be doable. The issue is finding a good and viable asset that won't deteriorate. Usually there's a reason why people sell.
Bank loans, equity partners, seller financing, and cash are the options I've seen. Equity is harder for a deal this small. But bank loans are a definitely option. If you're in the US I think there are SBA loans that are available too.
Unless you are buying an already established business it can be very hard to find good financing for things like software since there will be nothing for the bank to repossess and evaluating it's worth might not be easy.
We had this problem with a previous business when we moved from a US Stripe account to a Canadian Stripe account (when we started the original business Stripe wasn't available in Canada).
We were concerned about CC rejections, but shockingly didn't deal with a single one. In the past customers would just call up their CC provider and tell them to expect a recurring change from vendor_name and it ceased being an issue.
One MAJOR problem we had was transferring subscriptions from the US Stripe Account to the Canadian account. Stripe used to do this service for you (it has for us twice, once when we moved from US ==> Canada, and once when we sold the Canadian assets to another US corp). But they don't anymore, and their documentation and process around this is WOEFULLY lacking. Probably have a blog post in us about the process.
But I've seen a couple situations where one partner brings the asset and the other brings sweat and they've been quite fruitful. One in particular I'm thinking of turned a 120k arr business into a 1m arr (and growing) business. So it's possible.
IMO it's a good writeup on how a financial buyer dots the i's and crosses the t's on a deal but the main driver of a deal isn't that, it's just, can it be grown into a much bigger business, and what are the potential risks and rewards.
Do the buyers love the business and are they willing to do whatever it takes to realize that potential? If the buyers aren't thinking like founders and are thinking like financial buyers worried about the last few percent, it's a recipe for problems.
The risks are sufficiently large in taking over someone else's code and customers, that only reason to buy it is if you think you can make it worth multiples of what you're paying.
As a seller, it might make sense to do an earn-out or retain a small equity stake and involvement with the right buyers, but being a minority partner without the type of protection VCs get (board seat, liquidation preference, pro-rata follow-on rights / anti-dilution) is a terrible position to be in, unless you are very sure of who you are dealing with, so typically not with this type of financial buyer.
If the buyers had to get loans, sell other assets, etc to make it happen, it would introduce risk - in delay, extra negotiations or even total failure - for the seller.
The truth of the matter is that many business are for sale if you ask. The right approach is to think about the type of business you want to buy, build a list of all of the ones that fit and to cold email them and see if they'd be interested in selling. Basically the same approach you'd take if you were trying to sell B2B software i.e. Predictable Revenue style.
I can already hear people saying, "No way people don't do that" or "That would never work" but it does and people do. In fact we know a number of people that bought their businesses using that approach and it is exactly what we were about to start doing before Codetree fell in our laps. It's also the way that a lot of PE, VC and search fund deals get done.
As a buyer that's the last thing you want because it drives the price up. See point 6: http://www.berkshirehathaway.com/2000ar/acq.html.
For deals of this size you can also look for smoke signals e.g. you're looking to buy something for 200k-300k in EBIT and you go to their about page and find 50 employees you're probably barking up the wrong tree.
It's also worth pointing out that you're looking for one person to say yes. If you hit on folks that aren't a fit and never email you back or laugh you away so what. That's the nature of the game. You just need one.
Kind of a neat way to not need all the money up front, and make the owner shows you his business is not on the decline.
If you think you're in a good negotiating position or if you've got concerns about the business then a vender take back or an earn out or both should definitely be on the table. It never hurts to ask ;).
Edit: Also, best of luck!
Edit: and thanks!
I saw this company on FE and requested more information.
In the end, I decided against making an offer because developers are notoriously hard to develop for.
That said, the business itself looked great, wish you the best of luck and good on you for taking a shot.
https://github.com/blog/2256-a-whole-new-github-universe-ann...
* GH Projects exist within a repo, so you can only have Issues from a single repo on a Project.
* A Project contains a subset of issues within a repo - they need to be added manually to the project. This would make it tough to manage a whole project with a Project because you'd have to manually add any issue you created to it.
* You can't filter issues in a Project. Fundamentally a Project is not driven by a query, it's driven by manually adding issues to a Project. So slicing and dicing issues on a Project isn't possible.
I think GH Projects could be used to manage the release of an Epic (e.g. a subset of issues grouped together within a repo). But I think it'd be challenging to manage an entire project with one.
1 - http://blog.codetree.com/articles/the-important-differences-...
I'd want to feel good about the reasons the creator wanted to sell and keep working on it. I think it would be hard to take the product where we wanted without the creator getting frustrated - if s/he had the vision and ability to execute, why did they need to be hired?
That said, I'd be open to it.
> how would you estimate the valuation in that case? would you offer him/her the price to purchase the side project in addition to a salary? or offer a unique compensation package that takes into account of the valuation of the side project?
Hard to say because I think it depends on the situation.
Otherwise, it depends what you want to learn. I'm sure a quick search on Amazon would be fruitful.
If you're interested in buying a business the people who know how all this stuff works are the private equity people (PE). These guys do this stuff all day long (obviously at much larger scales. If you search you can find a fair amount of info on PE. On a smaller scale there is good info from people researching search funds. Search funds are basically small scale PE. Here's a good starting point: http://www.gsb.stanford.edu/faculty-research/centers-initiat....
If the codetree was looking to raise funding, it seems like a reasonable metric for valuation.
One month of an average engineer's time costs an employer around $20k. Could one engineer recreate this product in 6 months working full-time? The maker of codetree probably has a really good idea of how long it takes. If the answer is yes, does the buyer have someone on hand to take this on? if not, you have to hire someone, that takes time. If you don't want to do that, contract it out at double the cost. Then at the end of the day you're now delayed however long it takes to finish the product plus maybe hiring time.
Codetree's initial blogpost says the developer took 6 months working part-time to launch the initial product. Supposing it could be done in 3 months working full-time to get to the latest iteration, cost to develop is $60k + 3 months + 1 engineer or $60k + 3 months + 3 month hiring process + 1 engineer(new hire) or $120k + 3 months + 1 contractor. Pulling an engineer off of a project also adds cost to the project they would have been on had they not left.
I would guess the effective cost of development is $120k + 3 months time, if you want to acquire the product instead, the question becomes how much money would you be willing to pay to have it now (plus negotiation time) instead of 3 months from now?
If Codetree was doing $120 in ARR after 2y of FT development, he's not going to be able to sell it for 2y * salary_to_build_app. He's going to sell it for some multiple of $120 minus expenses.
* the cost of development is higher than any multiple on earnings I can get
* I know the buyer's BATNA is developing the product themselves
anything that isn't a above expected development cost is leaving money on the table.
They may be fully willing to walk away and in many cases probably will, because if they were THAT gung-ho about competing in your niche market there's a good chance they'd already be involved with something competing with you and much more likely to decide to just build it themselves.
Actually having more than a nominal number of paying customers is also a huge factor - how long did it take codetree to get those customers? Add customer acquisition time to your development time estimates.
Importantly as the buyer a big part of what you're buying is customers that you can talk to and work with vs. just the code. If we thought Codetree would have taken twice as long to build but had zero customers we wouldn't have bought it at half the price. Having paying customers proves that you've bought something that other people value. Buying code just gets you code and you may find out that no one will ever pay to use it.
Wonder if prices like this are more attractive to techies.
This guy had you right where he wanted the entire time and he knew it. He didn't have to lift a finger or budge an inch. You clearly show your hand(s) way too much (which is clearly in your nature given this blog post, and that's not always a bad thing... although in this case it was).
If it was a really large deal, you'd need to be willing to walk and show it. Instead of reading a relatively overrated book that did you absolutely nothing, I'd recommend having someone be the bulldog/enforcer and have no qualms about it.
But ultimately, I have a feeling you're going to be so successful in something eventually (if not this!) that this money is meaningless in the grand scheme of things, so it's all cool and maybe you knew that.
But man, that was painful to read. Good stuff otherwise and great luck guys!
> Github would improve its Issues product and render Codetree irrelevant
That seems like a very large risk, especially given GitHub's progress to date. How will it be addressed?
Codetree looks great! Good luck!
The prospectus stated Derrick was selling to focused on Drip, which was a plausible reason to sell.