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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

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.

kareemm 10y ago
Hey Alex, in transactions of this size (sold through a broker like FE), valuation is often based on earnings.
HeyLaughingBoy 10y ago
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 10y ago
  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 10y ago
    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 10y ago
      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 10y ago
        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.
      - rstocker99 10y ago
        From the seller's perspective you've got to have a buyer and buyers at this price point buy on a multiple of SDE vs. development cost. If dev cost is greater than what buyers will pay then as the seller... you're probably going to have to eat it and take less. Importantly as the buyer a big part of what you're buying is customers that you can talk to and work with vs. just the code. If we thought Codetree would have taken twice as long to build but had zero customers we wouldn't have bought it at half the price. Having paying customers proves that you've bought something that other people value. Buying code just gets you code and you may find out that no one will ever pay to use it.
pbreit 10y ago
I was a bit surprised they were quibbling over a few thousand dollars at that point.
- kareemm 10y ago
  Why pay more when you can pay less? ;)
  - pbreit 10y ago
    To avoid losing the deal. From my reading, didn't end up getting the discount and losing the deal a real possibility.
    - kareemm 10y ago
      I don't think we were even in danger of losing the deal because we always moved when the seller said no to terms they didn't like. We never stood firm and forced the seller to move on their position.

kareemm 10y ago

Hey Alex, in transactions of this size (sold through a broker like FE), valuation is often based on earnings.

HeyLaughingBoy 10y ago

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 10y ago
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 10y ago
  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 10y ago
    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 10y ago
      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.
    - rstocker99 10y ago
      From the seller's perspective you've got to have a buyer and buyers at this price point buy on a multiple of SDE vs. development cost. If dev cost is greater than what buyers will pay then as the seller... you're probably going to have to eat it and take less. Importantly as the buyer a big part of what you're buying is customers that you can talk to and work with vs. just the code. If we thought Codetree would have taken twice as long to build but had zero customers we wouldn't have bought it at half the price. Having paying customers proves that you've bought something that other people value. Buying code just gets you code and you may find out that no one will ever pay to use it.

pbreit 10y ago

I was a bit surprised they were quibbling over a few thousand dollars at that point.

kareemm 10y ago
Why pay more when you can pay less? ;)
- pbreit 10y ago
  To avoid losing the deal. From my reading, didn't end up getting the discount and losing the deal a real possibility.
  - kareemm 10y ago
    I don't think we were even in danger of losing the deal because we always moved when the seller said no to terms they didn't like. We never stood firm and forced the seller to move on their position.