
I Merged My One-Person Software Company with a Bigger Player (2018) - rwalling
https://philderksen.com/why-i-merged/
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kreetx
In the text the author discusses also selling the company outright - question:
how does one calculate a price for this usually? A few years' profit?

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everdev
Yes, service companies usually sell for 2-3.5x annual recurring revenue (ARR),
which is measured by averaging your last 3-5 years of revenue.

And you'll need to be easily replaceable.

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slivanes
Recurring revenue or profit?

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everdev
It's almost always revenue, but I'm not sure why.

I'd pay more for a business doing $500k in revenue with $250k profit (50%
margins) than a business doing $1M in revenue with $100k in profit (10%
margins).

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einarvollset
Usually it's dependent on the person selling (or their advisor). If a company
is very profitable (e.g 50% margins) then an earnings multiple makes sense and
the advisor will essentially present the company in such a way that it's
pretty clear to the potential buyer that they're expected to think of
valuation in terms of profit multiple. Incidentally, lots more buyers out
there are comfortable doing that then revenue multiple. However, a revenue
multiple has become the norm for companies with very highly recurring revenue
(e.g. SaaS) and where the company has been run for growth instead of profit.
There are many fewer buyers who will do that though, and getting leverage for
deals like that is harder (a big driver of returns for some funds)

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charlesdm
No sensible buyer (i.e. not strategic) is going to pay high revenue multiples
for a private illiquid company. Exceptions to this might be when they have
some advantage (existing customers etc) to sell to. But nearly all PE shops
overpay on large deals.

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einarvollset
By strategic, I don’t mean “sensible” or “smart”, I mean it’s a buyer where
the asset is considered strategic, hence it would always fit under your “when
they have some advantage” umbrella.

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cabaalis
I want to make a minor point that is not a critique but more a statement so
first of all, congratulations on your success!

I think we as a society need to stop referring to single member entities with
no employees (meaning a single, sole person) as a "company."

"Business" seems like a better term, or even just "product" if that's what
you're selling. But "company" naturally implies multiple people, which lends
credence to the business as it means the business can support more than one
income.

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arcturus17
Not only is this completely wrong from a legal and business standpoint, why
would we even need this as a society?

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cabaalis
I find the term personally confusing when only one individual is involved.
Most definitions of the word include multiple people. It would seem that's an
unpopular opinion here. Meh, can't win them all.

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kristianc
It's about establishing and limiting legal liability. Being able to establish
a solo business as a company means that you don't lose your house and
possessions if your company fails.

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ProCicero
There is very little liability protection for a single-member company. You are
usually going to be personally liable for your actions, and can get sued
individually along with the company. Incorporation / LLC does not protect you
from acts where you are also personally liable, and it does not shield your
personal assets in that case either.

Edit: in the US, that is.

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charlesdm
This depends on the country. Most (single member) companies in EU countries
have excellent protections in place for directors and shareholders as long as
you don't do anything illegal.

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username444
This.

For Canadians: [https://www.ic.gc.ca/eic/site/cd-
dgc.nsf/eng/cs06641.html](https://www.ic.gc.ca/eic/site/cd-
dgc.nsf/eng/cs06641.html)

