4 ms·

I Merged My One-Person Software Company with a Bigger Player (2018)

82 points by rwalling 7y ago

deleted 7y ago
[deleted]
cabaalis 7y ago
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.
- ptah 7y ago
  a company is a separate legal entity, not a collection of humans
- arcturus17 7y ago
  Not only is this completely wrong from a legal and business standpoint, why would we even need this as a society?
  - cabaalis 7y ago
    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.
    - kristianc 7y ago
      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.
      - ProCicero 7y ago
        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.
        charlesdm 7y ago
        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.
        username444 7y ago
        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
        mcbits 7y ago
        The main issue for single-member LLCs in the US is to actually operate it as a separate entity. Don't share assets, accounts, etc. Don't personally guarantee debt unless you absolutely have to (and then you'll be liable for that). And of course you're still liable if you personally break the law. If you hire an employee and they assault a customer or something, your company may be sued like any larger company, but they probably won't be able to pierce the veil and go after you personally to collect.
        soared 7y ago
        What? This is 100% incorrect. Unless you make obvious errors, all of your personal assets are protected. > Like shareholders of a corporation, all LLC owners are protected from personal liability for business debts and claims. This means that if the business itself can't pay a creditor—such as a supplier, a lender, or a landlord—the creditor cannot legally come after an LLC member's house, car, or other personal possessions. https://www.nolo.com/legal-encyclopedia/llc-basics-30163.html https://www.nolo.com/legal-encyclopedia/llc-basics-30163.htm... Obvious errors being breaking the law, paying for your business loans with personal funds, etc.
- caprese 7y ago
  A lot of people fought for the legal framework to become competitive enough to include single member entities in the word company, as it inherits all the privileges of multi member companies without the administrative hassle or prerequisites. Another definition just because your society hasnt caught up to the legal benefits conveyed would be redundant and not be informative at all. This is a significant reason why you would lack consensus on this opinion.
  - deleted 7y ago
    [deleted]
- C1sc0cat 7y ago
  Most single person consultant companies have more than one shareholder. In the UK my mother was the company secretary for my Fathers company he used for consulting.
- neogodless 7y ago
  I think I'll be the oddball here, and lightly agree with the gist of the comment. "Company" as per dictionary definition is "a number of individuals assembled or associated together; group of people" and in this context, "business" is at least equally as accurate, if not more so. Because you can be a "company" of chorus singers that go door-to-door giving out free song, but "business" much more precisely means you provide something in exchange for currency, either by yourself or as part of a larger group, and really "software" can be set up to be a "zero person" company, something capable of making money regardless of the people involved. That's something you can really sell. I think the reason this comment is so disliked is because it's strongly worded as if the original word usage was a horrible, systemic mistake. > we as a society need to stop This is unnecessary. Sure, the vocabulary choice would probably be improved a bit with "business", but it really didn't take away from the story. If not for it saying "one-person" in the title, it might haven taken slightly longer to process "Oh, solo entrepreneur, got it" vs "small company with a few employees" - which is not totally insignificant. It's a bit of a difference between a personal choice that affects one person vs. a leader and some followers who are being taken down a different path.
kreetx 7y ago
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?
- everdev 7y ago
  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.
  - runako 7y ago
    The company in the article appears to be more of a software company & less of a service company. From the conversations I've had, I would expect to see a valuation in the range of 2-5x the company's earnings. (The term of art is SDE/Seller's Discretionary Earnings, and is basically the sum of all the money the owners are able to take out of the business, including paychecks and bonuses.) FEI and other brokers write a bunch about valuing small businesses: https://feinternational.com/blog/how-do-you-value-an-online-business/ https://feinternational.com/blog/how-do-you-value-an-online-...
  - slivanes 7y ago
    Recurring revenue or profit?
    - kreetx 7y ago
      Revenue would be nicer I guess, but if it's software that simply works then maybe they are not much different? Not how revenue and profit compare in other types of industries that is.
    - gnicholas 7y ago
      In the few conversations I've had, it's always been revenue. This provides an incentive to spend lots of money on user acquisition, even if doing so means losing money (or not making as much). I wish there were a standard assumption that if a business is profitable, then we use profit instead of revenue, and (crucially) use a much larger multiplier. It feels like I'm always having to remind folks that revenue ≠ profit, and that normal guidelines (we invest in companies with $X00,000 revenues) might need to be adjusted for smaller, breakeven or profitable businesses.

82 points by rwalling 7y ago

deleted 7y ago

[deleted]

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.

ptah 7y ago
a company is a separate legal entity, not a collection of humans
arcturus17 7y ago
Not only is this completely wrong from a legal and business standpoint, why would we even need this as a society?
- cabaalis 7y ago
  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.
  - kristianc 7y ago
    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.
    - ProCicero 7y ago
      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.
      - charlesdm 7y ago
        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.
        username444 7y ago
        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
      - mcbits 7y ago
        The main issue for single-member LLCs in the US is to actually operate it as a separate entity. Don't share assets, accounts, etc. Don't personally guarantee debt unless you absolutely have to (and then you'll be liable for that). And of course you're still liable if you personally break the law. If you hire an employee and they assault a customer or something, your company may be sued like any larger company, but they probably won't be able to pierce the veil and go after you personally to collect.
      - soared 7y ago
        What? This is 100% incorrect. Unless you make obvious errors, all of your personal assets are protected. > Like shareholders of a corporation, all LLC owners are protected from personal liability for business debts and claims. This means that if the business itself can't pay a creditor—such as a supplier, a lender, or a landlord—the creditor cannot legally come after an LLC member's house, car, or other personal possessions. https://www.nolo.com/legal-encyclopedia/llc-basics-30163.html https://www.nolo.com/legal-encyclopedia/llc-basics-30163.htm... Obvious errors being breaking the law, paying for your business loans with personal funds, etc.
caprese 7y ago
A lot of people fought for the legal framework to become competitive enough to include single member entities in the word company, as it inherits all the privileges of multi member companies without the administrative hassle or prerequisites. Another definition just because your society hasnt caught up to the legal benefits conveyed would be redundant and not be informative at all. This is a significant reason why you would lack consensus on this opinion.
- deleted 7y ago
  [deleted]
C1sc0cat 7y ago
Most single person consultant companies have more than one shareholder. In the UK my mother was the company secretary for my Fathers company he used for consulting.
neogodless 7y ago
I think I'll be the oddball here, and lightly agree with the gist of the comment. "Company" as per dictionary definition is "a number of individuals assembled or associated together; group of people" and in this context, "business" is at least equally as accurate, if not more so. Because you can be a "company" of chorus singers that go door-to-door giving out free song, but "business" much more precisely means you provide something in exchange for currency, either by yourself or as part of a larger group, and really "software" can be set up to be a "zero person" company, something capable of making money regardless of the people involved. That's something you can really sell. I think the reason this comment is so disliked is because it's strongly worded as if the original word usage was a horrible, systemic mistake. > we as a society need to stop This is unnecessary. Sure, the vocabulary choice would probably be improved a bit with "business", but it really didn't take away from the story. If not for it saying "one-person" in the title, it might haven taken slightly longer to process "Oh, solo entrepreneur, got it" vs "small company with a few employees" - which is not totally insignificant. It's a bit of a difference between a personal choice that affects one person vs. a leader and some followers who are being taken down a different path.

kreetx 7y ago

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?

everdev 7y ago
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.
- runako 7y ago
  The company in the article appears to be more of a software company & less of a service company. From the conversations I've had, I would expect to see a valuation in the range of 2-5x the company's earnings. (The term of art is SDE/Seller's Discretionary Earnings, and is basically the sum of all the money the owners are able to take out of the business, including paychecks and bonuses.) FEI and other brokers write a bunch about valuing small businesses: https://feinternational.com/blog/how-do-you-value-an-online-business/ https://feinternational.com/blog/how-do-you-value-an-online-...
- slivanes 7y ago
  Recurring revenue or profit?
  - kreetx 7y ago
    Revenue would be nicer I guess, but if it's software that simply works then maybe they are not much different? Not how revenue and profit compare in other types of industries that is.
  - gnicholas 7y ago
    In the few conversations I've had, it's always been revenue. This provides an incentive to spend lots of money on user acquisition, even if doing so means losing money (or not making as much). I wish there were a standard assumption that if a business is profitable, then we use profit instead of revenue, and (crucially) use a much larger multiplier. It feels like I'm always having to remind folks that revenue ≠ profit, and that normal guidelines (we invest in companies with $X00,000 revenues) might need to be adjusted for smaller, breakeven or profitable businesses.