
What it's like buying a $128k side project - kareemm
http://blog.codetree.com/articles/what-its-like-buying-a-128k-side-project.html
======
ryandrake
It's great to read the details about what it takes to buy a small business.
Thanks for posting this and being so open about what went into the
negotiation. I always thought (if I were to one day run into money) buying an
already-running business would be a better, less risky path towards
entrepreneurship than starting with a blank text editor!

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.

~~~
kareemm
> 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!

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.

~~~
rstocker99
(I'm one of the purchasers of Codetree) I had also thought that banks wouldn't
be interested in lending in cases like this but surprisingly enough when we
talked with our bank after we made the purchase they mentioned they'd be very
interested in financing us if we were looking at buying other software
businesses in the future. When I had talked with them a few years ago there
was no way they'd have loaned money for a purchase like this because it has no
tangible assets. They told us straight up that they understand the world is
changing and they are now interested in making these types of loans. They get
that small businesses owners today are just as likely to be software companies
as they are to be restaurants. We're Canadian and our bank is TD.

~~~
charlesdm
Question: Did you acquire the assets with a Canadian entity? I'm assuming so.
Did you have any problems transferring the billing subscribers? I'm EU based,
and one of the concerns I've had / I have is that some US based customers seem
to be getting auto rejects by their credit card provider (i.e. Stripe) when
billing. Not exactly sure how I discovered that -- I think some guy wrote
about it on a SaaS forum somewhere.

~~~
kareemm
Yep, we acquired the assets with a Canadian entity.

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.

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citizens
Thanks for being so open with this information...makes me want to get my side
projects back in gear.

Edit: Also, best of luck!

~~~
NDizzle
Wow, yeah, thanks for sharing!

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gxs
Wow how interesting to read this here.

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.

~~~
kareemm
Ha, thanks for not making a competitive bid :) Appreciate the kind words.

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kareemm
OP here. Happy to answer any questions!

~~~
Keats
Any book or resource to learn the financial projections etc?

~~~
rstocker99
Are you asking about valuations? FE has a post on how valuations work. It's
pretty simple. Basically a multiple of how much cash you can take out of the
business. If that number is small and not growing then the multiple is small.
If the number is big and/or growing fast then the multiple will be larger. The
key is it's about how much cash the business makes now vs. traditional tech VC
land is about... how big this might be some day maybe.

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...](http://www.gsb.stanford.edu/faculty-research/centers-
initiatives/ces/research/search-funds).

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alexbeloi
It's not obvious to me why price was a function of earnings in a situation
like this, the goal of the purchase seemed to be to save resources of
developing the tracker inhouse and save time building up a customer-base,
earning seems mostly irrelevant in this case.

If the codetree was looking to raise funding, it seems like a reasonable
metric for valuation.

~~~
HeyLaughingBoy
The goal of the purchaser was to save cost of development but the goal of the
seller was to get as much as possible. In that case, basing the selling price
on earnings makes more sense for the seller. After all, he can always look for
another buyer if the deal doesn't work out.

~~~
alexbeloi
I guess I thought the cost of development would be higher than $128k, so it
would be beneficial to the seller to use that as a metric.

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?

~~~
kareemm
The issue is that to a buyer, the inputs don't matter. We're buying the
outputs in the form of business results.

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.

~~~
alexbeloi
My thinking is that if I'm the developer of codetree and

* 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.

~~~
fencepost
As a seller you may not know that much about the buyer's BATNA - in
particular, are they looking for "my product or something like it" or are they
looking for "a solid product with customers and a seller unable/unwilling to
grow it."

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.

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thoughtpalette
Amazing breakdown. I've always been interested to see how these negotiations
go from both a developer perspective and armchair entrepreneur.

~~~
kareemm
Thanks. Hadn't seen anything like this either so wanted to share :)

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strictnein
128 = 2^7

Wonder if prices like this are more attractive to techies.

~~~
xyzzy4
128,000 is not 2^7

~~~
strictnein
No, of course not. But the price was listed as "$128k". The closest power of 2
to the actual full price is 2^17, but I doubt most technical people would
recognize that as 131,072.

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MicroBerto
Wow, if you want to learn how _not_ to negotiate a deal, this is the story to
read!

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!

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apo
About risks, the article notes:

> 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?

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titomc
Very good insights on buying a side project. I too have some side projects.
But I never want to go fulltime into it because it's using APIs of some well
known services. I always say " Never play soccer in someone else's ground ".
You never know when they will throw you out of the ground. If you are basing
the business out of github's resources you are at high risk.

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seibelj
This is awesome! I like FE so much more than Flippa which has cheaper
businesses but appears rife with scams. I may buy a business here someday.

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GFischer
Thank you for being so open and sharing the actual spreadsheets. It makes
things a lot clearer for us dreaming for an acquisition someday :) - even
though I worked for a company that went through an acquisition as an employee
and even gave a talk on the subject, this is a new perspective for me :)

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sharemywin
I think what it comes down to it was such a small amount of money they knew
you weren't going to walk away.

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msmart
very interesting read. We looked at github issues mgt tools a while ago and
settled on huboard. We didn't find codetree during our search for tools... so
it's definitely a challenge to reach developers. Fine posts like this can do
the trick ;-)

Codetree looks great! Good luck!

~~~
ferentchak
Did you guys look at Waffle? My buddies made that with a few interns a while
back.

~~~
msmart
Yes, we looked at huboard.com, zenhub.io, waffle.io and blossom.io. There are
really a lot of tools out there. But I can't remember the reasons we choose
huboard over blossom. In addition, the tools evolve quite quickly. So the
reasons might be outdated anyway.

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econner
Why was he selling the website? (That would be my first question in evaluating
it)

~~~
metamet

      The prospectus stated Derrick was selling to focused on Drip, which was a plausible reason to sell.

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blantonl
What was the broker's commission structure in this deal?

~~~
kareemm
Not sure, the seller's the one who pays commission.

