A Tale of Selling a MicroISV

By Rob Walling of Software by Rob

About two months ago I put my Micro-ISV, a web-based invoicing system, up for sale. The sale played out exactly as I expected except for one detail: I didn’t sell it. Instead, I took on a partner.

You can read the full account of what I learned from “selling” my Micro-ISV, but here on 47hats I wanted to share some additional details about how I arrived at my valuation of 12-30 months profit, how the offer process worked, and why I decided to take a partner instead of selling it outright.

Micro-ISV Valuations

There are volumes written on how to value a business; somewhere there are people who’ve spent their entire careers doing nothing but learning how to determine the market value of a business based on a multitude of factors. Laundromats, as an example, are typically valued at around 50 times monthly net profit (with adjustments made for the age of the equipment, length remaining on your lease, and a slew of other factors).

And like every kind of business, websites and small software products have their own formula. If you spend any length of time on the website and domain marketplaces (sites where people buy and sell websites, such as SitePoint and DomainState), you’ll learn a rule of thumb: a website or domain name that requires minimal maintenance will sell for around 12 months of net profit.

I doubt anyone really knows why it’s 12 months, aside from the fact that it’s what the market has dictated. Keep in mind there are many adjustments to this number. If you have a generic parked domain name that gets a lot of type in traffic you can garner 24-36 months of profit, or a particularly high earning website that’s well automated can easily bring 20-24 months.

Since a Google search yielded no relevant information for selling Micro-ISVs or software products, I resorted to this range of 12-30 months. In my experience buying and selling web properties over the past few years, this range sticks pretty well to what the market will bear.

The Offer Process

Within a week of my “for sale” post I received 20 email inquiries, sent out nearly that many NDAs (find out why NDAs are worth your time), and distributed 13 sales packets that included a detailed description of the product with all the relevant data and a Google Analytics PDF showing information about website traffic.

Potential acquirers ranged from small software companies to individual developers. Most were in the U.S. and Canada. Many had the same questions about revenue, profit, how the code is structured (does it have a business layer? does it use stored procedures?) that I fortunately answered in the sales packet, but there were many more questions relating to marketing, SEO, advertising, unit tests, and a plethora of other issues.

I was surprised to receive a lot of questions about code structure and some other deep technical issues. This is something you’ll never see on a website sale (even a custom-coded site). I think the difference is comparable to someone buying a house for themselves vs. buying one as an investment. When you’re buying a house as an investment you often don’t see the inside of the house until after you have an accepted offer; all that matters is that the numbers work. But when you’re buying a house where you’re going to live…aesthetics have a major impact.

I spent about 10 hours answering questions and after about a week, when the requests for NDAs had slowed considerably, I set a deadline when I would be accepting sealed bids. I debated for some time on how to handle the bidding process – whether to use an open auction format or to go with sealed bids – and given the high price and somewhat intimate nature of the sale I opted for sealed bids. In retrospect I think I would have received more offers, and perhaps a higher offer, had I created a SitePoint auction and allowed people to compete against one another.

When the deadline arrived I had two purchase offers that were nearly identical, hovering around 12 months of revenue. I also had an unexpected partnership offer from a developer I’ve worked with on and off for the past 8 years.

Taking a Partner vs. Selling

Accepting a lump sum for DotNetInvoice was alluring, but I had mixed emotions about letting it go. Of all people, I know the potential of this product, and I have a vision of where it should head.

It’s interesting that in the past few years I’ve moved away from the more technical aspects of software towards the business side of things. SEO, marketing, PPC advertising, design…all things I’ve learned about and enjoyed. During this time I’ve realized that trying to be both the technical expert and the business expert for a product is a hard job, indeed. One person can have both skill sets, but applying them to a single product is a challenge in simultaneous left and right-brained thinking.

And this is what a partnership is ideally suited for: a division of labor. Luckily my partner is interested in handling the technical aspects, so the division is clear.

In the end, the complications of a partnership (contracts, finances, shared PayPal accounts) was outweighed by the knowledge that two people working together will make a better product than a one-man show. Jeremy and I signed out partnership contract in late May, and the next version of DotNetInvoice is due out before the end of this month.

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Rob Walling’s Boston-based consulting firm, The Numa Group, provides ASP.NET development for customers throughout the U.S and sells DotNetInvoice, the most popular ASP.NET invoicing system on the market. Rob is one of 350 Microsoft MVP’s in ASP.NET and is the author of numerous technical articles and the blog Software by Rob, where he discusses software startups, micro-ISVs, and everything in between.

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