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Acquiring a product that is slowly sinking


#1

I came across this Saas app and I approached the owners and they are considering selling it founder is busy with other work and this SaaS app is basically on auto-pilot for that last 3+ years.

The revenue is slowly decreasing over the years by about 20%.

In a situation like this, would you still set the value at 3x net revenue?

I see it as a risk to take on the project since it is decreasing by 20% per year, and on top of that updating the app will take allot of time/investment unless you are very selective on what you upgrade to get the most bang for your buck.

Anyhow, what kind of formula would you use in a situation like this?


#2

I think the right person to talk to here is Thomas Smale: https://twitter.com/thomassmale

In my opinion, you should not pay 3x SDE (seller discretionary earning).
It’s going down, so he can’t expect to get 3x SDE over the next three years. So obviously, that should be lower.


#3

Talking to Thomas at FE International wouldn’t hurt. They helped me sell Sifter, and they know their stuff. If it’s declining like that, even 2x SDE is pushing it. For context, Sifter was very well maintained, tested, and documented, and had been holding steady with no decline for years, and it went at 2.4 SDE (all cash deal).


#4

So just to loopback, I ended up acquiring this app for a fair price. I made a napkin based estimation on how much it was worth to me by taking a 2-3 year projection of gross earnings (which included the potential of a decline) and hard expenses (hosting, transaction fees, etc.) and then took a little bit off the top for good measure.

All in I think the original founders are happy and I took over an app that I think has great potential to be rejuvenated :slight_smile:

I’m sure I will disclose the product but I’m still getting all the ducks in order (finally transferred over the billing - took control of the server and just getting ramped up on the overal design and server config).

I’m a proud owner!


#5

Congrats and would love to hear how it works out for you in 6 months +.

I think there are probably a lot of apps similar that would benefit from some fresh blood.

Rob walling has done the same thing a few times I think, might be worth a read
http://www.softwarebyrob.com/2015/12/02/what-i-learned-buying-growing-and-selling-hittail/
http://www.softwarebyrob.com/2007/09/16/inside-story-small-software-acquisition-1-of-3/


#6

Hey Salman,

any updates on this?
Would love to hear how you’re doing!


#7

Hi @itengelhardt

I haven’t really updated the app in production yet, still slowly updating the code base to the most recent version of rails.
The earnings were as reported by the owner so I am happy on that front.

The app is using a very expensive VM to run it currently, it is some legacy VM where the price is very high and performance very low. I think I can run this on linode/DO for 25% of the price :slight_smile:

Once I have the version upgraded I will begin to refresh the marketing page and slowly update the app where required. The good news is that there is allot of room for improvement on the marketing page and SEO etc.


#8

Something tells me the order of these two should be the opposite, eh? Unless the version upgrade is required to migrate to a less expensive hosting.

P.S. Give us the URL! No need to keep the hijab on her :wink:


#9

It is using a very old version of rails (2.x) and I have no drive to support it myself. I don’t mind spending a few bucks more a month until I have upgraded it. This has been more of a passive side project so far and I am happy with it.