51

I have been developing iOS apps for a few years now. They do pretty well, and yesterday I was approached with an offer to buy one of them. The offer was for $40,000 dollars for an app that generates roughly $650 a month in income. The app has been growing, slowly but growing. I have no idea of this is a fair deal or not.

How do I evaluate the app's worth?

  • 8
    How much is it growing and is there a growth limit you hit soon (i.e. market saturation in a niece?) Because the price sounds ok for something with traditional prospects, but with an app "slow growth" may be 50% per year. – TomTom Jun 4 at 13:42
  • 5
    I assume that the income quoted in your question doesn't deduct the cost of the time that you spend working on the app. If you pay yourself an hourly wage, then your actual profit is smaller and might even be a loss. This needs to be factored into the value of your app, which none of the answers so far have addressed. Typical valuations for software businesses are 3-10x annual profit. This offer seems like a very good one. – gaefan Jun 5 at 10:05
  • 3
    As others have mentioned, it's difficult to say for certain. However have you considered negotiating licensing of the app? That is, instead of selling it for 40K to them now, you take, say, $30K now plus 25% of all future revenue. These numbers of course are hypothetical - just to illustrate the model. – Aleks G Jun 5 at 10:17
  • 12
    I know this is not what you asked, but do you know what they plan with the app? Do they want to continue developing and improve it? Integrate into an ecosystem of other applications? Or do they plan to scrub it in favor of their own competing solution; or stuff it with ads and sell user data to the highest bidder? Please put the offer not only under financial scrutiny but consider the impact on your reputation as a developer if user experience goes downhill after the buyout. I only heard examples for such outcomes from the Android universe, but that may be my own bias. – Dubu Jun 5 at 11:12
  • 5
    I don't know whether anyone else mentioned this, but by selling it now lets you do other things, so that addition to $40,000, you will have the opportunity to generate even more income. Plus, $1 today is more valuable than $1 tomorrow, so in order to earn $40,000 in todays money, the app needs to generate $650 more than 5 years, opposed to what the accepted answer says. – onurcanbektas Jun 6 at 5:17
78

We can't know. The question you need to ask yourself is: "Is this app going to make me more than $40,000?".

This is unfortunately a question which is impossible for us to answer. You say the app makes you $650 a month. If it would keep doing that, it would have reached that goal in 5 years. But will it?

You said it's growing, but will it keep growing? We don't know. Apps are a highly volatile market. The hot app of today might be obsolete tomorrow. Either because the app is riding on some short-lived lifestyle trend, because it will soon reach market saturation (anyone who needs the app already bought it) or because someone is already working on an app which does the same thing but better and has a larger marketing budget. You have to estimate if your app will stay relevant for years or not.

Or maybe your app is actually vastly underrated and waiting for its huge breakthrough? Statistically speaking that's very unlikely. But again, we don't know your app so we have no idea what its true market potential might be.

Also, will the app stay relevant without further work? How much of your own time do you plan to invest into supporting that app and how do you value an hour of your work? You need to subtract that from the income it generates.


But should you decide to sell the app, a few words of advise: Read the contract carefully! I have heard about people who got tricked into selling away their IP rights under really predatory conditions. For example a story about a publisher who tried to trick a developer into signing a contract where the developer was obligated to change and update the app for several years in whatever way the publisher demands without getting paid for it! Congratulations, you literally just sold yourself into slavery!

If you sell your app, make sure it's either a deal where you have no further obligations or one where you enter a business agreement where more work equals more money for you and where you have a reasonable exit clause in case you want to focus on something completely different.

When you are not 100% sure what you are actually signing up for or would like to propose a different arrangement, then it can be very helpful to seek advise of a professional attorney. When you are a freelanceer, then a good lawyer is part of the cost of doing business.

  • 3
    Not to mention that typically cash-in-hand today is worth more than the cash-in-hand you'll have tomorrow (or in 5 years) on a dollar-for-dollar basis. – ivanivan Jun 5 at 15:51
  • 37
    Shouldn't this be "have your lawyer read the contract" instead of "read the contract carefully" (yourself)? – R. Schmitz Jun 5 at 16:06
  • 15
    @R.Schmitz Do both. Obviously you should have a lawyer look at it, but that doesn't preclude you from looking at it and asking the lawyer questions. Eg, "hey this bit says something about transferring intellectual property, but I'm not sure what it actually means." But also be sure to ask questions about things that are missing. I had a work contract that initially lacked any kind of termination notice (the standard "two weeks" thing you typically think about for a job) and had that added in. When the team I was on was terminated unexpectedly half way in...I got two more weeks of work. – Draco18s Jun 5 at 17:57
  • 1
    Thank you so much for advice. Will definitively be taking the contract to a lawyer to have it be reviewed, if the deal moves forward. – Ross Sullivan Jun 5 at 22:05
  • 1
    I once lost a huge sum (high 5 figures) in a business contract, because I assumed the plain reading of a proposed contract looked right. It needed a lawyer to spot the problem/loophole, but nobody told me that at the time..... until i needed to depend on it,and it was too late. The situation i understood it to clearly cover, it technically didn't fully cover, in some cases. Yours sounds similar. Don't be caught the same way. Contractual language can be more slippery than you'd think, so get a lawyer to look at it,as you've said. – Stilez Jun 7 at 8:59
37

It is a decent offer. When one evaluates a business proposal the typical discount rate is 20%. That is a business is only worth investing in if it returns 20% on the initial investment.

So the math is this, 650*12=7800 yearly income. Divide that by .2, comes to 39K, basically spot on with the offer.

So you are left with the age old decision of which is more valuable the "bird in hand, or the two in the bush"?

The app could go viral shortly and be generating ten times the income it is now. In that case you would be foolish to take the 40K offer. Or the app could die, and next month the income could start a dwindle towards zero. In that case it would have been prudent to take the offer.

What is mostly likely that the buyer has a plan for this app to make it generate more income that will take work, but they are likely correct. One way to "hedge your bets" is to sell part of the app. Maybe take 30K and maintain a 25% ownership, which is pretty equivalent of what they are offering.

There is always the possibility of negotiating up, if the initial offer is 40K, what are they actually willing to pay? Can you get 75K and maintain 10%?

  • 1
    Actually the formula is wrong if the app is growing. See, this formula is for traditional businesses - which do not really grow (i.e. there is a physical limit how many people come to a restaurant, space, etc.), but if the app is in use and growing (as indicated) the numbers turn out higher. No idea how much - depends on growth rate and potential (i.e. not viral but it may be a market saturation style app with few users). If the app is not too old and grows like 50% a year (which is "slow" per month, actually) the value may be a lot higher. – TomTom Jun 4 at 13:41
  • 1
    A 20% discount rate seems seems high to me. As well as potential growth, an app has other major differences from say a restaurant: there's usually no risk of it making a loss, and it can generate income almost passively. – rlms Jun 4 at 21:35
  • Isnt the general advise to always reject the first offer? – lalala Jun 6 at 15:18
  • @lalala one great technique at discovering where the offerer is at is asking the question "now how can I do that"? Depending on how they answer, you can get a feel of where you can take the negotiations. It may very well be no where. – Pete B. Jun 6 at 16:00
  • 3
    I think I read the same book. But in this case the answer to "how can I do that" is actually: "sign the contract, cash the cheque", not sure how this moves negotiations forward. – lalala Jun 6 at 16:33
8

To take a different tack on the subject I would think about what else the potential buyer does in the app space. The buyer wants to pay you $40k for it which means they believe it to be worth more than $40k. Unless you have a very specific reason not to, you should assume they have more information than you. This means that someone who has more information than you thinks your asset is worth more than $40k, to them.

This leads to the next question which is, what can they do with it that you can't? Without knowing anything about your app, it seems unlikely that the buyer is going to do the same thing you are which, presumably, is having it for sale in the app store collecting mostly passive income. To me, it seems like they would market/advertise it more, make changes to it, and/or incorporate it into other products that they have. You need to decide how plausible it is that they can make more with it than you can. If you think it's highly plausible then lean more to selling if not then lean towards holding. This is just one other dimension to think about, not the only way to think about it.

  • 13
    Apps are not passive income at all, they take quite a lot of work to maintain (eg. as Apple releases new system, revises Store policies, or releases phones with new features, like notch on iPhone X). OP stated $650 is income, not profit. It's possible that OP could be already making a loss on the app in question, as iOS dev's time is quite expensive. – Agent_L Jun 5 at 15:01
3

I'll assume that the app does not grow significantly in revenue. Then one important thing to consider, economy wise, is this:

  • If you keep the app and it generates the 40k in 4 years - assuming slight growth, which is optimistic - it will be 40k earned while you still maintained it. That work is not free and you ought tu subtract it from the sum earned somehow.
  • If you sell the app, the buyer will presumably have their own them managing it and you get around 4 years of projected revenue with no work. You can invest the time and money you just got into future development.
1

It depends on the nature of the app. If it is a game, or a lifestyle app for a certain niche, nobody thought of before, I would probably take the offer. I don't see those type of apps suddenly experience an unexpected user growth and as the others already pointed out, apps are pretty volatile regarding the user base.

However, if the app is rather generic and of potential use for a large group of yet unreached users, like a social network, a new online service or a useful app for a trending topic (comparable to how "blockchain" was a hyped topic over the last 1-2 years), I would try my best to push it to its limits.

This is a matter only you can evaluate, but by already asking this question, you imply that you yourself do not see that much potential in the app to justify declining the offer. Otherwise, you would treat the app as your "baby" by trusting it more and thereby start solely working on this app to exploit its potential.

Furthermore, to include my own rationale: if I don't see it as a million-dollar idea myself, I would rather go the safe way of taking $40k. Maybe you sold the app under value and you could have made $60-70k over a few years, but as long as you don't see a potential of tenfold or more revenue, why take the risk? You could end up with way less than $40k.

-1

It's awful. You have an asset that 'yields' nearly $8000/yr, and are being offered $40K. The buyer would get a 20% return each year with a potential increase given your statement that the sales are rising. If I had a friend with such an app, I'd be happy to invest for a portion, say 1/4 of that revenue stream for a much higher price, and treat it as a potential for a windfall.

The real question to me, how badly do you need the money, and would it be used to create the next app(s)? Other than that, I'd ask why you're not more actively promoting this one to get it to a much higher level?

  • 41
    This assumes that the asset doesn't deprecate in value. With apps, that's a pretty unsafe asumption. An app which is popular today might be obsolete in a couple months. – Philipp Jun 4 at 13:39
  • OP stated it's growing. With no specifics, of course. – JTP - Apologise to Monica Jun 4 at 13:40
  • 25
    But mobile apps are a highly volatile market. You can't extrapolate sale trends over a period of 5 years. An app is not real estate or stock. The hot app of today might be obsolete tomorrow. – Philipp Jun 4 at 13:42
  • 6
    It's completely unreasonable to expect an app to keep performing for 5 more years without further investments. OP haven't said how much time they're spending maintaining the app - stated $650 is income, not profit. Apps are not passive income, it often turns out that time spent maintaining them is worth more than income. – Agent_L Jun 5 at 14:49
  • 1
    Posting an answer that you don't actually believe is correct seems like a bad idea. I don't think SO needs a devil's advocates. Leave it for someone who honestly believes the position. – Yakk Jun 5 at 19:57

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.