How to Sell an App for a Profitable Exit
Developing applications has become a great business venture, but did you know there is also a hungry market of buyers looking to acquire profitable apps?
Entrepreneurs and investors have over $1 billion stored with us so they can quickly purchase online assets like an app. This means that now more than ever, it’s an exciting time to sell an app business.
Before we get into how to sell an app and the best ways to maximize an exit, we should clarify what we mean by an app. Some of the most popular forms of apps include:
- iOS app
- Android app
- Shopify app
- WordPress plugin
- Salesforce app
- Facebook app
This is just a taste of the main platforms, and we’ve sold apps from all of them on our marketplace. You might be worried that your app is too niche, and there won’t be buyers out there; however, this is not the case. If your app is profitable, then buyers will be interested in it. Our recent sale of a Salesforce app for $73,326 in just four days exemplifies that point.
This raises the questions, who are these “buyers” that are purchasing app businesses? And wouldn’t it be easier to sell directly to the big platforms?
Should You Try to Sell Your App to the “Big Players”?
The idea of selling to the likes of Google is a dream for many app owners, and it’s easy to see why. High-profile acquisitions of apps like Instagram, Uber, and several others have made a big splash in the news.
To get a foot in the door at Google, Facebook, or Apple can be incredibly difficult, however, as they don’t make it easy to contact them. If there was a way of submitting your ideas to these giants, we would provide you with a link. Unfortunately, the best you’re going to be able to do is fill out a “contact us” type of form and hope for a response.
The general consensus is that these big players will reach out to you if they’re interested in purchasing your app, not the other way around. And there is also the risk that by reaching out to them, you’ll be giving them the idea to build something similar. Imagine submitting your app idea and then watching as the same features are released in the next update with no credit to your name, let alone any financial reward.
A better option is to access the hundreds, if not thousands, of investors who have capital of their own to buy your app business. These high-net-worth individuals are looking to use this capital to purchase turnkey businesses that allow them to skip the building stage.
Some buyers will be looking for apps that they can “fix-up” and try to double the monthly net profit, while others want a highly successful app that can be run with very little hands-on work. This is why you should forget about selling apps to the big players and focus your attention on preparing your app business to sell on the open market.
Why Should You Sell Your App Anyway?
You’ve worked hard to code an app, found a share of the market, and are earning a profit. Why would you want to sell? There are usually two main reasons for selling: personal and business.
The Two Main Reasons Why People Sell Their Business
Sometimes life throws something at you that you just didn’t see coming. Take the COVID-19 pandemic, for example, which is an event that affected almost everyone in some way. When you own an asset, such as an app, you have the opportunity to sell it and access a lump sum of money should you need it.
These personal reasons don’t have to be as serious as a pandemic. Some sellers are looking to purchase real estate and selling gives them enough money for the deposit or maybe even enough to pay for the property in cash; some sellers have a child on the way and are looking to spend more time with their family in addition to having some extra funds to help with the costs.
Whatever is going on in your life, it can be comforting to know that you have the option to sell should you need it.
It’s pretty common for entrepreneurs to have multiple projects on the go or to at least have ideas for new projects. Selling gives you the capital to invest in growing your other businesses or to fund your next startup.
This can be useful, as it gives you the resources to become self-funded, meaning you can avoid taking out loans or having to pitch to investors. This is the concept behind the asset flywheel, where you can compound your success to build or buy even more profitable assets.
Although your app may be running without requiring a great deal of work from you, it’s likely that it’s still taking up some of your attention, whether it’s for updating the product, checking the analytics, or managing your team. Selling provides you with a clean slate to concentrate on your next move.
Collect Two to Four Years of Income Upfront
Essentially, behind both of these reasons is the desire to receive a large amount of capital. We’ll get into how to value an app below, but you can expect to earn two to four years of average annual net profit from the sale of your app.
The possibility of cashing out and earning this kind of money is difficult for some people to ignore. This is especially true in the app market, where there is fierce competition, and just because you have paying customers, that doesn’t mean they’ll stick around forever.
How to Sell an App to a Buyer – What You Need
The fact of the matter is that most apps won’t reach unicorn status. Unless there’s good evidence that you’re the next Uber, you’ll need to prepare your business for sale in a slightly different way.
Buyers on the open market don’t care about your idea; they care about how much money it’s generating. In order to list, you’ll need to get your financials in order and create a profit and loss (P&L) statement.
A P&L statement should include a month by month breakdown of revenue, operating costs, expenses, and net profit.
Reviewing the P&L of a business is usually the first part of a buyer’s due diligence process. A bad month or two isn’t going to put potential buyers off, but misreporting the numbers, whether intentionally or accidentally, will lose a buyer’s trust.
This is why we recommend that you hire a bookkeeper to take a look at your numbers before deciding to sell. At Empire Flippers, our vetting team will work to compile the P&L on your behalf.
Buyers will also want to find out more about your user-base. Having an enormous amount of downloads isn’t as important to them as seeing that you have a large user-base that has committed money to your app in some way.
Building up a share of the market is one of the most difficult parts of establishing any business. And this is a big part of why buyers are looking to purchase assets that have already earned a captive target audience. If you have a large number of active users, that will put you in a better position when it comes to selling.
Due to the competitive nature of the app market, stability is a quality that’s thought very highly of. Buyers like to see that your app is here for the long term.
That’s why stability is often better than being in a phase of hypergrowth. It can be difficult to judge where the growth is going to level out, so you’re effectively asking someone to buy based on potential rather than established data. Buyers understand that the trajectory of your business can dip back down just as easily as it jumped up.
When you decide to list, you’ll want to refrain from selling in the middle of any major updates. The product that’s listed should be the same product that the buyer receives. You should still maintain the app with minor updates, though, including any necessary updates released by the platform. Apple, for instance, updates their devices fairly regularly, so you’ll need to make sure the app is optimized for the latest iPhone, iPad, and Mac updates, where applicable.
How Deep is Your Moat?
This question contains a metaphor that refers to how easily your app can be copied. If you have little that makes you stand out, then this is going to make you less valuable to a buyer.
This doesn’t mean that you have to have a completely novel idea that no one has ever thought of. Instead, you should have rather unique selling points that differentiate you from your competitors and that will make it difficult for your rivals to take you down.
This could be a slightly different set of features or a more streamlined design—whatever makes you stand out is likely the reason users are choosing your app over anyone else’s.
If you have time before selling, consider setting up a feedback option, so users can let you know what they like about your software and what else they would like to see implemented. You may not have time to put the ideas into production, but you will have plenty of actionable feedback to supply the buyer with. There might even be some quick wins in there, which buyers are always on the lookout for.
How Valuations Work When Selling an App
The standard formula for valuing an online business, including an application, is:[6-12 months’ Average Net Profit] x Multiple (Typically 20–60+)
It should be pretty easy to work out your average net profit once you have created a P&L. It’s fairly standard to have at least six months of profitability before you list your business for sale, but it is important to keep in mind that if your app is less than a year old, you are greatly reducing the number of buyers your app will appeal to.
The first part of this formula is what’s known as a pricing window. The number of months used depends on the trajectory your business is on.
12-month window: This is the gold standard when it comes to pricing your business and will allow your app to receive the highest suitable multiple. Buyers like to see this window, as it gives them the most data with which to assess your business. It also helps to level out any seasonality that might occur throughout the year. Where possible, we recommend that you wait until your app has at least 12 months of earnings before you decide to sell to get the most from a sale.
6-month window: When a business is a period of high growth or decline, a 12-month pricing window isn’t really applicable. This is because the first six months of the window don’t accurately represent how the business is currently doing, so the pricing window can be shortened to better reflect the new reality.
Doing so might give you a higher average net profit, but it will result in a lower multiple due to the uncertainty regarding where the business will level out. There are many different influencing factors, so there will typically be a smaller pool of buyers interested in businesses using this window.
3-month window: A window this short almost never gets used, as it will result in the worst possible multiple. There simply isn’t enough data for buyers to accurately judge the state of your business, so there will be barely any interest from them. This window is almost exclusively reserved for very young businesses that are five to eight months old and in the valuation range of $50–100K. If you have an app business that is valued higher than that, selling with a three-month pricing window will be very difficult. It’s usually better to wait until a larger pricing window can be used.
While your business is on the market, the valuation will be updated on a monthly basis. If you use a window that is less than 12 months, it will be extended month by month until you get to 12 months or until the business is sold. Where possible, we recommend that you aim for a 12-month pricing window, as it means your app business will appeal to the widest pool of buyers and investors.
What’s in a Multiple Anyway?
There are many factors in addition to the pricing window that are considered when determining the multiple at which your business is valued. The following are some of the main factors that affect your multiple.
Diversifying the channels that bring users to your app has a positive effect on your business. It means that you aren’t reliant on one channel, so if anything were to happen to one of the channels, it wouldn’t completely dry up the stream of new users finding your app.
There are a few different traffic channels that can be used for an app:
- Paid advertising (Google ads, Facebook ads, app store ads)
- Organic app store search
- Through your website (search engine optimization)
- Social media
Combining a few of these channels to diversify your traffic puts your app in the best possible position. It becomes more difficult for competitors to outdo you if you have several effective marketing strategies.
Like many software-based models, there is a churn rate associated with apps; most people aren’t going to be lifetime customers. You can offset this factor by consistently bringing in new users to your app. This is why apps with diversified traffic channels receive a better multiple.
Revenue is another important factor in determining the multiple your app will receive.
Many apps follow the freemium model where the initial download is free, but users are then encouraged to pay for additional features through cross-sells, up-sells, and in-app purchases. Using a selection of these methods to offer value to users is the best way to make money from an app. Investors love to see recurring revenue, so adding a subscription payment is a great way to further increase your multiple.
In-app purchases tend to work well in the gaming niche, where they allow users to level up quicker. On some marketplaces, such as the iOS store, it’s possible to promote these purchases, and they can rank as search results on their own. This increases the discoverability of your mobile app and brings in more revenue.
Display advertising is another common monetization method for apps. as it can be added relatively easily.
Finding a balance between making your app as profitable as possible and avoiding negatively affecting the user experience requires testing. Buyers will dig into the reviews of your app to see what the consensus is on how things are being run. People won’t hold back if they think you’re promoting too vigorously.
Like a fine wine, businesses get better with age. An app that has been around longer and has maintained its place in the market is more appealing to buyers. It’s proof that you have a model that works and a user base that appreciates your product. This kind of loyalty is impossible to manufacture overnight, and an older business will nearly always get a better multiple because of it.
Many Other Factors Go Into Valuing an App
There are plenty of factors that go into valuing an app—too many to talk about in this article.
The best way to get a true feel for how an app is valued is to actually get a valuation from an impartial and reputable source. It doesn’t mean you have to sell right away, but it allows you to see where you’re at and what is required for a valuation. From there, you can either decide to list your app for sale or work on increasing your valuation until it reaches a figure you’re happy with.
Take a few minutes to use our free valuation tool and see what your app is worth. It has been built using sales data from over 1,000 online businesses and is constantly updated to reflect the current state of the market.
How Do You Find Someone to Buy Your App?
When it comes to selling your app, you have two main choices: private sale or broker.
In a private sale, you facilitate the deal yourself, and this has both pros and cons.
By doing a private sale, you avoid paying commission to a broker.
You will have to source a buyer yourself, which can be difficult, especially if you don’t have many connections in the industry. You could reach out to your competitors to see if they are interested, but be wary of them gathering information for their own benefit.
It can be time-intensive to deal with buyers and respond to their questions. So if you choose to go the private sale route, you’ll need to carve out some extra time in your schedule.
Empire Flippers is a full-service brokerage, meaning we offer you assistance all the way through the sales process. We’ll tell you exactly what we offer, so you can compare our service with what other brokers provide. Just as it’s important for buyers to do their due diligence on your business, it’s important for you to do the same for a broker. Here is what you need to know:
- Our commission structure ranges from 2–15%, depending on your listing price.
- You will have access to our extensive contact list of buyers, who have over $1 billion of investable liquidity. Access to this market generates competition to acquire the business, which can help drive the price up.
- Every buyer on our marketplace has to verify their identity and provide proof of funds before they are permitted to view sensitive information about your business.
- As a full-service broker, our vetting team will build your P&L, our sales team will act as an intermediary between buyer and seller to maximize your exit, and our dedicated migrations team will transfer your business over to the new business owner.
How to Negotiate When Selling Your App
Negotiations should be a collaboration, not a showdown. The aim is to arrive at a deal that is mutually beneficial for the buyer and the seller.
It isn’t necessary to use any underhand sales tactics to gain an advantage, but there are a few things that you should have planned out before you enter negotiations.
One marketing skill you can use is copywriting.
Find out the problem the buyer is motivated to address, and position your app as the solution. Maybe your app has a set of features that means a buyer doesn’t have to build something from scratch. Be prepared to walk buyers through how your software works; many buyers on the open market won’t have technical know-how regarding app development.
If you can’t explain your basic business model to potential buyers, they’re not going to be interested. Write it down and consider whether it looks appealing to someone with no knowledge of your business.
Minimum Price Threshold
Determine the minimum price you would be happy to walk away with. After all, a difference of a few thousand dollars between your valuation and the sale price is not likely to be worth losing a deal over.
Still, you also don’t want to get trampled in the heat of the moment. That’s why setting a minimum price threshold is a good practice. It prepares you to get a price that you’re happy with and makes it less likely that you’ll lose out on a deal because you were fixated on a particular valuation.
The Give and Take
During negotiations, it’s common to experience something we call give and take.
This occurs mostly with larger deals, above $100K, as smaller deals tend to go through quicker with less of a back and forth between buyer and seller. For larger deals, if you want a higher price point, you might need to accept an earn-out. This means that you’ll get a lower price upfront, but will receive payouts over subsequent months until the agreed-upon figure is reached.
However, if you want more money upfront, then you may need to accept a lower sales price. This is why there is a give and take; there needs to be some room to negotiate depending on the kind of deal you’re comfortable with.
How to Sell Your App Using…Leverage
Creating a profitable app is no mean feat.
This is why buyers are willing to part with good money to own one. When it comes to selling, you want to give yourself the best possible chance to not only find a buyer but also have the whole process go smoothly.
Just as you might hire an app developer to write code for you, you can hire a broker to sell your app. Brokers give you a ton of leverage when it comes to selling an app by doing everything from helping you build a presentable business, to marketing the app for sale, to granting you access to their large buyer database, to even helping you negotiate and ultimately transfer the app over to the new owner.
To put all of this to use, sell your app with us by first getting a valuation, and then setting up a 30-minute call with one of our business analysts. They can guide you through how the sale process works and help you to sell your app for the most profitable exit possible.