Episode 15 | How to Buy a Web Application

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Show Notes

• Flippa
• Websitebroker
• Compete.com
• Escrow.com
• Micropreneur.com
• Hoovers.com
• Dunn and Bradstreet

Transcript

[00:00] Mike Taber: This is Startups For the Rest of Us: Episode 15.

[00:03] [music]

[00:12]  Mike: Welcome to Startups For the Rest of Us, the podcast that helps developers be awesome at launching software products, whether you have built your first product or are just thinking about it.  I’m Mike.

[00:21]Rob Walling: And I’m Rob.

[00:22] Mike: And we are here to share our experiences to help you avoid the same mistakes we’ve made.  What’s going on this week Rob?

[00:27] Rob: Not much.  I spoke at a .NET user group last night.  It was a lot of fun.

[00:32] Mike: That’s cool.

[00:33] Rob: Yeah, I talked about turning your software idea, your product idea, into a real app and selling it to people.  It was a lot of fun.  There were about 25 people there and a lot of good questions.  It’s always good, since I work from home and I live in a place where I’ve only lived here for about a year, don’t have a lot of friends here.  So it’s really cool to get out and see how many other people are interested in the same things that I am, basically.  Because I forget that there’s anyone within a 100 mile radius of me who likes this stuff.  I had a lot of fun.

[01:02] Mike: Cool.  You said you ran into some podcast listeners there as well.

0:01:06] Rob: I did.  That was cool!   There were a couple of people that came up and just said, “Hey, liking the podcast.”  That was a shock—meeting a listener face to face.  It was really cool.

[01:16] Mike: Cool.  Excellent.

0:01:17] Rob: Yeah.  How about you?

[01:17] Mike: I’m getting ready for a trip to Germany in a couple of weeks.  So that will be cool.  I’ll be there for about two weeks or so just doing work.

[01:25] Rob: So it’s for business?  You doing consulting work there?

[01:27] Mike: Yeah.  I’m going over there for a week and then I’m going to take a flight down to Geneva and Switzerland for a couple of days, just for the weekend and hang out there. I’ve got a couple of friends who live there.  Then I’m going to fly back to Germany at the end of the weekend and finish off the second week and fly home.

[01:42]  Rob: So be honest.  You are going to Geneva to open your Swiss bank account, huh?

[01:46] Mike: Actually, I’d like to go to Zurich for that, just for the name.  Geneva’s not a bad place to go for that either.  But we’ll see what happens.  I always thought it would be kind of cool to open up a Swiss bank account with like a dollar just so that I could go to parties and be like, “Yeah, I got a Swiss bank account!”

[01:59] Rob: I agree!  Yeah, that’s cool!

[02:01] Mike: See how many ladies I can bring home and how many my wife would disapprove of!  [laughs]

[02:05] Rob: All of them I would guess.

[02:08] Mike: Most likely, yes.

[02:09] Rob: Well good.  Drink some warm beer for me and have fun.

[02:13] Mike: Yep.

[02:14] [music]

[02:16] Mike: What are we doing this week?

[02:17] Rob: Well, we’re doing the whole podcast to answer a listener question.  Someone named Jeff McNeal wrote it.  He’s from New Spin Designs.  And he writes:

[02:27] “Hi there.  First off, thank you so much for producing the podcast.  I’ve just found it and have been listening to your previous episodes back to back.  I’m founder and principal of a small web design/UX consulting firm, though I find much of your advice carries over to my consulting practice.

[02:43]  I recall in an earlier episode one of you mentioned about a future podcast on the subject of finding and purchasing existing software apps or websites.  This is of particular interest to me.  Where do you find these sites for sale?  Are you cold calling or emailing apps that you find online?  How are the terms of the agreement worked out?  It’ sounds similar to buying a brick and mortar business, though there are certainly a unique set of challenges here.  I look forward to hearing more of your podcasts on this topic.”

[03:09] So today, that’s what we’ll be talking about: how to acquire a web application.

[03:14] Mike: And for anyone who doesn’t know what UX design is, that’s User Experience design.

[03:19] Rob: The first thing we should cover is why you might want to buy an app at all.  If you are a software developer, you are going to tend to want to write the code yourself, own the code.  That’s part of the fun, is building the app, for most people.

[03:30] If you’re not a developer, then buying makes a lot more sense.  And if you are a developer, there are still some pretty good reasons of why you might want to buy.  The first reason why you might want to buy is basically the decision comes down to time versus money.

[03:43] So, if you are a software consultant, you bill $100 an hour, and you can pay $6,000 for an app…and this is a real example I’m giving.  If you can pay $6,000 for an app that would take you about 500 hours to write, obviously, that would be a good deal for you.

[04:01] Products, meaning web apps, websites, and software products, they typically sell for between four and 18 times the monthly net profit.  So if you think about that, an app generating $500 a month, if it sells for, say, 12 months, you are going to pay about six grand for that.

[04:16] Whereas building an app and getting it to the point of $500 a month tends to be a lot of hard work.  Just in case you’re curious, the discrepancy between four times and 18 times, in that range, mostly depends on the quality of the app, how you get traffic, how much maintenance you have to do to keep the app working and to keep an ongoing marketing effort going.

[04:36] Mike: In my mind it’s really very, very similar to deciding whether or not you are going to build Microsoft Word or buy it because you want to use it in your business.  I mean you could certainly take the time and effort to build a web processor, but when you can pay a few hundred bucks and just buy one, it really just does not make sense to go down that path of trying to do that.

[04:56] So the build versus buy decision is very much a good consideration that you have to take into account.

[05:02] Rob: That’s a good point, actually.  It really depends on your goals.  If your goal is to have fun and enjoy it and write code, and you love to write code, you probably don’t want to buy.  But if you’re goal is to own a product and own a profitable product and grow it, and potentially learn the marketing side of it, and make income, and potentially, ultimately quit your job, maybe, if it’s any of those things, then yeah, it really does teeter towards the buy rather than build.

[05:28] Mike: So the second reason why to buy is it allows you to decrease your market risk.  And there’s three different kinds of risks.  There’s technology, the market, and execution.  Technology risk is more or less nonexistent, because the vast majority of things that you are going to go out and build are things that you are going to be technically capable of building.  There’s not a whole lot of things out there that most people couldn’t build, even when it comes down to something like a search engine.  I mean you could certainly start small and build up from there, but chances are good that you are not going to be competing with Google.  I mean that’s not a market you would actually go into.

[06:04] And granted, they’ve got some pretty complex algorithms there to begin with.  But again, it comes down to what market you are going to go into.  But in terms of other technologies, try and think of existing products that are out there, and think about whether or not you have the technical skill to actually implement those. The fact is that you probably do.

[06:23] The second type of risk is being able to bring your product to market and to be able to effectively support and deliver that product.  Now, if you start building a product that is basically just too large for you to build by yourself, or has to long of a sales cycle, I mean you’re certainly just not going to be successful with that.  So that’s something else that you have to be careful of.

[06:45] And if you’re buying a product, the fact is that that product is already built.  You don’t have to worry about building it and then trying to figure out how you are going to deliver it to the market.  You’ve already got…essentially, you are buying a prototype that you can look at, you can play around with it, you can see what it looks like, how it works, and figure out whether or not there is a market before you even buy it.  You don’t have to invest all of this time upfront of actually building it and then figuring it out.

[07:09] The third type of risk is market risk.  And that’s determining whether or not there’s a market for your product.  And if you are buying an existing product, the great thing about it is it’s got at least some kind of a track record that you can look at.  And if you’re trying to build a product from the ground up, typically you want to figure out whether there’s a market before you start writing code.

[07:29] And the great thing about buying a product is that you already know whether there’s a market for that, because theoretically, you will be able to see the sales figures from the product that you’re interested in acquiring.  And you essentially dramatically reduce the risk that there isn’t a market for that product.

[07:44] Rob: Yeah, these days, especially for small startups and micropreneurs, the largest of those three risks is market risk.  Because like you said, technology risks kind of doesn’t exist for us, unless you are building something really complicated.  And the execution risk, although there’s a big piece of marketing in there, and that’s important, you can learn that and you can implement that over time.  But if there’s no market, there is no market.  And you’re not going to know that for sure until you launch.  So buying a product is actually a good way to hedge your bet against market risk.

[08:15] Now let’s take a look at a couple of pitfalls; a couple of reasons why buying a product is hard.  The first one is that it is really, really hard to find good products for sale.  Contrary to what someone selling you an information report on late night TV might say, there are not a lot of good apps for sale.  So it’s going to take a lot of looking and a lot of due diligence to find an actual good web property for sale.

[08:39] Now, especially if you are not interested in web apps.  If you want a mobile app or a desktop app, I’ve seen literally a handful for sale over the past three years of looking at the places that we’ll talk about later.  I see a lot of websites for sale.  And then I see some web app for sale.  I see a reasonable amount.

[09:01] So if you’re into SaaS apps, you have a better shot at finding something.  But even then, finding something that’s good, that is generating revenue, and that has taken some of the market risk out of it, it’s not easy and it is time consuming.  So we certainly don’t want to make this out to be some silver bullet that’s going to get you past the development stage and into owning a profitable product.  It can work, and it has worked.  I’ve bought a number of products successfully.  But it requires quite a bit of time investment.

[09:27] Mike: Now, looking to buy a mobile app isn’t something that I’ve really paid attention to, because that’s just not really a market that I’m interested in pursuing, the mobile and handheld market.  I understand that it’s big and it’s hot, and there’s a lot of people who are rushing to that because of the gold rush mentality.

[09:42] But just for the listeners, what have you seen in terms of the price points for some of those mobile apps?  Do they tend to be more expensive than your standard web or SaaS apps, at least in terms of the multiples of revenue that you are buying it at?

[09:54] Rob: Yeah.  From what I’ve seen, they have been, because it’s the gold rush mentality you talked about.  I’ve actually seen a bunch of Facebook apps for sale when Facebook was really hitting its uphill swing.  And then as the iPhone apps space got really big, as it was ascending, there were a few iPhone apps for sale.  I would say, I’m trying to think over the past year, I’ve maybe seen five iPhone apps for sale.  Typically. when I see an iPhone app for sale, I skip it because it’s not a market I want to get into.  I have watch-listed a few and seen them go through the whole cycle.

[10:30] Since it is such a hot commodity and everyone’s hearing about it, yeah, it does bump it above the normal profit multiples that I mentioned earlier.  I shouldn’t say above, but it bumps it into that higher end of that.  Where if it was just a SaaS app making that much, it wouldn’t be. It would sell for less money.

[10:47] Mike: So the second pitfall that you could run into is that it is very difficult to verify everything that the seller is telling you about of their product.  I mean it would be very easy for them to fudge some statistics or leave out some of the support emails if you request them.  There are all these different things that are just going to be very, very difficult for you to verify when you’re trying to buy somebody else’s product.

[11:09] You just have to be very careful.  And if somebody is acting a little bit shady or doing things that just don’t quite strike you as something that you would do if you were trying to sell an application, then you might want to be a little more cautious.  In fact, you may very well want to pass on an opportunity entirely if you don’t feel that they’re being truthful or completely upfront with you about certain things, because you can very easily get screwed.

[11:34] Once you’ve sent over your information and sent them the money and you’ve received all of the goods, whether those goods include the code or whatever databases are associated with it, if things don’t work at that point, or if what you received wasn’t quite what you expected, it’s kind of too late.  So you really do have to be careful that you have a good feeling about the product that you’re buying.

[11:57] Rob: Yeah, definitely.  I’ve backed out of two sales in the past six months precisely because of what you said.  The seller was just saying things that were just a little out of whack, and they provided all of the proof that I needed.  My research panned out.  We’ll talk about doing due diligence a little later.  All that stuff was matching up, but in both cases, what the seller was saying, it was off.  The seller just seemed, I don’t know how to describe it, but it was like this bad feeling that I had.  I backed out of both of them even though I wanted them.  They were both revenue generating and they were good products.

[12:32] This is a definite pitfall and it’s one that you can easily fall into, and you really have to do your due diligence and get a little experience doing it to avoid basically getting out a product that doesn’t live up to what the seller’s claiming.

[12:45] Mike: Right.  The thing to really keep in mind is that if you pass on something, it’s not one of these once in a lifetime opportunities.  You’re going to be able to find other things to buy.  Don’t think of it as, “Oh my God.  I missed the greatest opportunity of my life by buying this application.”  The fact is you’re not buying Google.  You’re buying an application that will make you money, but you don’t want to pay a price that is far too high.  And the money that you spend is not just your only consideration.  You also have to take into consideration the time and effort you’re going to put into that product after you acquire it.  If the seller wasn’t up front about everything, you could very well end up with a situation where the cost is much, much greater than you expected.

[13:27] So now, why don’t we talk a little bit about how to find applications that you can buy?  Rob, one of the places we’ve looked at before is Flippa, which used to be called SitePoint.  Why don’t we start there?

[13:38] Rob: So Flippa.com is the eBay of websites.  As such, since it has a network effect going on where they have a lot of buyers and sellers, people don’t just sell websites.  They sell anything software related.  So you will see mobile apps, iPhone apps, Facebook apps, and some web applications.  And every once in awhile, you’ll see some desktop applications come through.

[14:02] The good thing about Flippa is there’s a lot for sale.  The bad thing about Flippa is there’s a lot of crap for sale.  You really have to weed through 99 websites to find the one good site that you may want to buy.  The best way that I’ve found to do this is to subscribe to their RSS feeds.

[14:19] They basically have three categories.  They have startup websites, which are very low end, they have midrange listings and they have high end listings.  The startup websites category, it’s so many listings that, if I’m really actively searching for a product, I will go through that RSS feed.  I’ll subscribe to it and I’ll skim through it once or twice a day.
[14:40] But when I’m more sitting back and I’m not really into really looking for a hard core acquisition, I actually skip that one and I remove it from my reader.  I always subscribe to the midrange and the high end listings because those don’t tend to have near the volume that the startup one does.

[14:55] The other place that I have found some decent web apps is called the WebsiteBroker.com.  The problem is they tend to be way overpriced.  They tend to be off….their multiples are 30, 50, 100 times net profit.  Or they’ll ask 10 or 20 grand for a site that’s not generating any net profit.  So it’s really kind of odd.  I’ve emailed with maybe half a dozen different sellers over the past couple of years, and they aren’t really open to negotiating.  They kind of don’t understand how this whole game works.

[15:25]  I recommend Website Broker, but I’ve never had success with it.  So maybe I don’t recommend it.  It’s kind of an in between one.  Again, if I’m really on the lookout to buy an app, I’ll add it to my RSS reader.  And when I’m not, I just delete it.  Luckily there’s only one category and there aren’t very many listings on it, so it’s easy to keep up with.

[15:46] Mike: So the second place that most people would think of to find applications for sale is eBay itself.  Rob’s already mentioned that Flippa is sort of the eBay of website applications. But most people, when they’re going to buy something, they’re going to look on eBay.  eBay’s not really a great place to look for it, because there’s really not a lot there.  eBay has a really low signal to noise ratio.  There’s so much garbage there.  You might find one website out of 500, or one application out of 500 that’s even worth looking at.

[16:17] And because eBay isn’t really designed for you to be able to easily search for these desktop applications or these web applications, it’s very hard to find them.  When you do find them, it’s very difficult to sit there and go through and compare them.  That’s kind of why we recommend that either using Flippa or Website Broker, because it’s very well defined.  You go to that website and you know exactly what you’re getting.  You don’t have to worry about advertisements for shoes out there.  You don’t have to worry about trying to sort through different listings that include tennis rackets and this and that and everything else.

[16:49] Granted, on those websites you might find a website application where they are specifically geared for selling tennis rackets, or where they’re trying to sell running information, you know marathon training information.  But again, it’s just very difficult to sort through all those listings on eBay.

[17:07] Rob: The other source I’ve found for buying web apps is to actually cold email people; to do a Google search and if you find an app that you think you want to buy to email people and just start the discussion.  This is a decent way to do it if you have a niche that you’re really committed to. You want to get into the niche but you think rather than building, you may want to buy an existing player.

[17:30]  It works especially well if they have an aged website, because that’ll help you with search engine authorization later.  Especially if they have an out of date website or product, because realistically, updating that product . . . Let’s say they have a desktop version, you can add a SaaS component, or you can just update the desktop version and make it better.

[17:47] There could be some opportunity there for you.  Obviously, you still have to check the niche out and do all the research on it.   I have had a low level of success with this approach.  I did a cold email campaign about two and a half years ago where I had a couple of niches picked out, and I noticed there was already quite a bit of competition in all of the niches.  So I emailed everyone.  I got a few responses back.

[18:11] It turns out that when you’re trying to buy, when you’re on the buy side, and people don’t know these multiples that apps typically sell for, like on Flippa, it’s pretty tough to convince someone that if their app makes $1,000 a month that they need to sell it for between $4,000 and $18,000.  That just sounds really low, especially if you’ve spent a year or two building it.  That turned out to be one challenge.

[18:34] The other one is I just didn’t get a lot of responses.  A lot of people aren’t interested in selling their app.  It makes sense.  I think I sent out maybe 30 emails over the course of a month.  I did get probably four or five replies.  So it’s a pretty good hit rate.

[18:47] But I did have good luck of acquiring a product kind of through this method.  It was actually just keeping my eyes out.  Someone posted on the forums they had this great .NET product and they were having trouble with marketing.  They were looking for a partner to help them market it.  I basically offered to purchase it from them instead.  And that product is .DotNet Invoice, which most of you know, I’ve owned for several years.

[19:08] Now, there’s a whole story behind that.  It was the second product I ever purchased, so I didn’t do any due diligence and the thing was in shambles when I got it.  I had to rewrite most of it.  The story’s been told on my blog before, I won’t go into it here.  Since I did have good luck, just kind of being out there and keeping my eyes on the forums.  And someone’s asking for marketing help with their product, well, maybe they would consider selling it to you.  I certainly had good luck with that approach.

[19:34] Mike: Yeah, see I tried this once and it didn’t work out so well for me.  I emailed this guy named Steve and I got literally a one word answer back.  It was “No”.  It was about this little product called OSX and I don’t know what happened.  I don’t know what his deal was.

[19:49] So Rob, what are the approaches that people can take to do a little bit of due diligence?  I think you and I had come up with eight different things that we specifically thought of that you really need to take into account when you are looking at it to acquire a product.

[20:03] Rob: That’s right.  The first one is to review the proof of traffic and revenue that the seller provides.  This is typically done by the seller providing screen shots, or much better is for them to provide a screen cast of them looking at these things.  Those are harder to fake.  Feasibly someone could Photoshop a screen shot.

[20:21] But you want to see proof of their revenue and you want to make sure you can somehow attribute it to that website.  You definitely want to see proof of traffic.  Hopefully they have Google Analytics installed.  That tends to have a pretty reliable and stable number. There are other stat packages out there; you’ll just see screen shots in it and you just know something’s not right based on the hits versus visitors versus page views; the numbers are out of whack.

[20:46] Ideally you get the Google Analytics PDF that encompasses their whole dashboard.  One point to note that I learned in the last year is that you really want to look at the referrers.  Which people are sending traffic to the website?  Because people can buy traffic, so they can bump up their numbers.  If they won’t provide you with the referrers, you need to back out, because there’s probably a reason for it.

[21:11] Mike: So the second thing that you need to keep in mind when you’re doing your due diligence is you need to sanity check the traffic rates with a website called Compete.com.  What this will allow you to do, is it will allow you to take a look at the traffic numbers that the seller’s providing you, and then by comparing them to what Compete.com says that they should be approximately, you’ll be able to tell whether or not those numbers that they’re providing to you are out of whack.  Because the seller’s not always going to have Google Analytics.  They might have AWStats or various other things that they use to measure their traffic.

[21:45] So this is more or less just a sanity check.  You want to also try to do a sanity check on the conversion rates.  What you can do is you can ask them what their conversion rate approximately is and hopefully they’ll be able to tell you.  If not, you can take their sales and compare it to the incoming traffic and just get a ballpark estimate of the number of visitors versus the number of those visitors that actually purchased whatever the product was.  You can very easily come to an estimate of what the percent conversion rate is.  If that number is more than like 10% or 20%, in most cases, if it’s even more than 2% or 3%, you might want to be a little bit careful.

[22:23] If it’s doing that “well” at 3% or 4%, I would at least start asking a few more questions and trying to figure out what’s really going on.  Maybe take into account what the reasons they say they are selling that application.

[22:36] Rob: Your third step for due diligence is to ask for all of their expenses relating to the site.  This issue’s a tough one because it’s pretty easy for somebody to hide expenses.  With revenue they’re not going to hide that. But if someone’s paying a virtual assistant to do something or they just have some processing fees or something, they really could probably get around giving that to you.

[22:58] You’ve got to kind of trust the seller on this one, which is a tough way to go, and really asks a lot of good questions about how each step of a process happens.  If there’s fulfillment, you need to ask about those specifically and find out what those fees are.  Just pay attention to what the potential fees could be and make sure to get screen shots of each of them.

[23:19] Mike: So the fourth step for doing your due diligence is to ask for the hours of support per week.  This is a really big deal, because it’s very possible that part of the reason they’re trying to sell the product is because they don’t want to support it anymore.  They’re getting a lot of support calls and people are asking a lot of questions such as, “Hey when’s the next version coming out” or, “When are you going to fix this bug?”  This is something that you very, very much need to pay attention to because of the fact that after you buy the product, as I’ve said before, buying the product, the initial money that you pay is just one part of the whole equation.

[23:51] If you buy the product and your expectation is you’re going to spend four hours a week on it and you end up spending closer to 40 hours a week doing support and you have no time left over to improve the product or do any sort of marketing, you’re income for that product is going to plummet through the floor.  The amount of time and effort that you’re spending to support that product for which the sales have already been made, it’s just not going to be worth your time and effort.  So make sure that you ask how much time and effort they’re spending on support.

[24:20] If you can get it, ask them for a copy of the last 20 or 30 emails they’ve gotten asking for support.  That way you at least get an idea of what kinds of support issues they’re dealing with.  Those things can really tell you if there are some major, major problems in the code that you’re buying.

[24:37] Rob: And the fifth step is to verify the specific technologies that are needed.  First you’re going to want to find out does this run on Linux or Windows?  You’re going to want to find out can it run on shared host?  Does it need a virtual private server or a VPS?  Does it need a dedicated server?  You want to find out if it needs a specific merchant account.

[24:57]  Actually, I’ve run into this problem specifically with payment processing where I didn’t have an account with the merchant provider, and I figured I’ll just modify the code.  But the code is in ColdFusion, and sure enough, I worked with it for nine years and I guess I thought it would be easier.  So now I’m here and I’m either going to have to pay a developer to modify the code so it will work with the merchant account I typically use, or I’m going to have to sign up for an authorize.net account.  Neither of these options is great.  It just means additional time and money out of my pocket.

[25:31] So try to verify all the technical pieces it needs.  The database, is it MYSQL.  Is it SQL server?  To make sure that you either have a hosting account for that already, which is great, or the actual price to host in and take care of the site.

[25:45] Mike: So the sixth step in your due diligence is to Google the product name.  This may seem like a very obvious thing to do, but Googling a product name is going to tell you a lot about that product.  You’re going to be able to see how long this products been around, whether that matches up with what they say, and give you at least that little extra knowledge or a little extra verification that you’re looking for to try and identify people who are trying to be a little bit shady about the product that they’re selling.

[26:12] You can also try and find out whether they’re hiding some information.  You’ll be able to see if there are people out there on forums either saying good things or bad things about this particular product.

[26:22] One other thing you might want to do is also check the domain name itself and see if they own the domain and if they are authorized to even be giving it over to you.  You may very well run into somebody who’s trying to sell you a domain that they don’t actually own.  So that’s another thing you have to be careful of.

[26:38] The last part of this is verifying that that product doesn’t have a competing product that shares the same name.  That’s something that could be very, very critical.  You could end up buying a product that part of the reason they’re selling it is because maybe they’re getting sued.  Just be cautious of those types of things.  Being sued isn’t the only part of that equation, because if you’re competing with another product that happens to have the same name, then you’re basically running into another marketing problem, because you’re going to have to compete with not only other products in your niche, but you’re also going to have to compete with another product that has the same name.  You could very well run into product confusion.  And eventually, somehow that’s going to have to get resolved.

[27:19] Rob: Step seven of due diligence is, specifically if you’re buying software application, is to try the software.  Really do a QA job on it.  Run through all the features and make sure the thing works. Don’t take the sellers word for it that there are no bugs in the software.

[27:33] And the next thing to do is to look at the code.  If it really is an app that you’re going to have to maintain, you want to see the structure of the code.  You want to make sure it’s written reasonably and that you can deal with the code, that it’s not some really weird standard that they’ve used that’s just going to send you for a loop if you try and update it.

[27:51] Now if you’re buying more of a website or say it’s a WordPress installation or Joomla ,something standard with just a theme, I don’t tend to look at those in advance.  If they look fine and they function fine, then I’m probably not going to be rewriting the pieces of it.  When it’s an application, specifically if you’re going to sell it with a source code or that you’re going to have to add a lot of features to, then yeah, you really want to know that you have a decent base to start from.

[28:16] Mike: The eighth step of due diligence is to contact current customers if you possibly can.  Don’t assume that those customers are happy.   As I said before, asking for the most recent 15, 20, 30 support emails is certainly going to help.  But if you can talk to customers directly and ask them why did they buy the product?  Are they having issues with it?  These are the people who are actually using the product on a daily basis, or hopefully on a weekly or monthly basis, depending on the product.

[28:42] They are more than likely to uncover the types of problems that the seller is not going to tell you about.  Just by talking to some of those customers, they’re going to be hitting parts of that code that the developer, the seller’s just not hitting on a regular basis, maybe they’re not paying attention to it.  It will certainly help you in figuring out whether this is going to be a good buy or not.

[29:04] It will also help you figure out what the general attitude of the customer base is.  If they’re extremely unhappy with the support or the level of service or something like that, having you come in and buy the product might actually be a good thing.  It really depends on how upset they are and the reasons they’re upset.  You can certainly turn things around very quickly by being responsive to the customer base if they’re not being paid attention to.

[29:30] So Rob, let’s talk a little bit about how to actually close a deal.  I know that you have kind of your own method for doing this.  But why don’t you talk about that for a minute.

[29:38] Rob: What I typically do is I approach it differently based on the price point.  So if the seller and I have agreed on a deal and its $1,000 or less, I typically will ask the seller to send me a Pay Pal invoice.   I will pay it with a credit card, and then the seller just sends me everything at once. Transfers the domain, sends me the website.

[29:57] The benefit of paying with a credit card is that when you call your credit card company, they’re always going to do a chargeback for you. If you just pay directly with Paypal,  there can be some complications with doing a chargeback – not always, but I’ve run into a hang up once.  And so now I try to pay with a credit card and it makes it easier.

[30:12] If the purchase price is over $1,000, and that’s not an exact limit, like I bought a site for $1,300 and I did it with the Paypal credit card method, but it’s somewhere around the $1,000 mark that I start thinking about changing it. That’s when I actually create a legitimate legal contract. You can search Google for software product sale or contract for sale of website and you’ll find a few templates.

[30:38] You know, again, this is not legal advice. Obviously you’ll want your lawyer to look over it or you kind of take your chances modifying it yourself. And then, once you get that contract faxed back and forth that kind of defines the terms which, basically, sets up the purchase price that you’ll get the domain, all the stuff that you’ll get and that they’re giving you the rights to, then I will  typically use escrow.com, which costs a few hundred bucks, and it’s geared more for transferring domains.  So assuming you’re buying a website or web app it works pretty well. You can just set it up and there’s an escrow process that takes place over the course of a few days. It’s pretty seamless.

[31:13] If you’re doing a desktop app or a mobile app or the domain name is not involved, then you can do a half up front deal where you send them half then they send you all the code and everything else and then, you know, you send the final half.

[31:27] Typically, there will be a domain name associated with it, even if it’s a desktop app or an iPhone app or a mobile app.  And in that case, the seller should really keep the domain name until all the money is transferred. You should get everything else after the first half is given.  And then once you make the final payment, then the seller should transfer the domain as the final piece.

[31:45] And after that’s done, after the terms of the deal are sealed and you have all the code and everything, then it’s time to revamp. It’s time to improve the marketing, improve the product, improve the support. I mean, these are the goals here is that if you can’t improve upon those things, then it makes it tough to increase the value of the product and increase the revenue and make your money back.

[32:06] So to recap, we’ll just look back through the eight points of due diligence since that was the one that’s most complicated. Step One is to review proof of traffic and revenue.  Step two is to a sanity check the traffic rates with compete.com. Step three is to ask for all expenses. Step four is to ask for hours of support per week.  Step five is to verify the specific technologies needed.  Step six is to Google the product name. Step seven is to try the software and look at the code.  Step eight is to contact current customers if possible.

[32:36] [music]

[32:39.8]  Mike: So we have another listener question to go through this week, and this one’s from Kevin Cuwol [sp].  And he’s actually got a two part question in here. We’ll kind of stick to just the first one because we’re running a little short on time.

[32:50] He says, “I’m working on a software solution that will be going live in a few weeks. You can find it at www.eroutingguide.com.  And I’m looking for advice and resources to help with the launch. I signed up for the PDF on the micropreneur.com website. Do you have any additional recommendations? The solution is logistics transportation related and targeted to shipping managers. I’m having trouble finding many online organized communities to become part of for my social media efforts.”

[33:18] The website that  Ken alluded to, micrproneur.com, where he downloaded the PDF is, I think we mentioned it on last week’s podcast, is the website that Rob and I run to help developers with startups and marketing.  And one of the things that comes to mind is that the shipping managers that you’re trying to reach is probably a difficult community of people to reach.

[33:38] When you look at a lot of the different online communities, it can be very easy to find people who congregate around their pets, for example. You can find a lot of communities for cat lovers and dog lovers and various hobbies that people have.  But when it comes to work related stuff, developers fall into one category of people who are online all the time and they congregate at various websites.

[34:01] When you get to what I’ll call less technical professions, what you find is that that really doesn’t happen. They tend to talk to each other more than they will essentially hang out online. So my inclination is to believe you’re probably not going to find too many online communities where you’re going to be able to target shipping managers.

[34:19] There are places where you can go and buy information related to those types of companies and operations.  And what you can do is you can go to companies like Hoovers.com or to DunnandBradstreet.com.  And those types of companies will help you to essentially identify your target market. You can find companies that match any given set of statistics. So if you’re trying to find companies that are between 50 employees and 1,000 employees, you can really narrow down your searches with that type of information.

[34:50] In addition, you can narrow it down by a specific market vertical, and by market vertical I mean healthcare industry or manufacturing or packaging.  And those are the things that you really want to get into.

[35:02] He did specify he is looking at logistics and transportation related shipping managers, so what I would probably do is I would probably look at anything that is in the retail space, manufacturing, or package.  And those types of companies, if you target companies between probably 50 employees and about six or seven hundred, you are probably going to find a bunch of them that you can target with that information.

[35:24] And I don’t know how much the information you are going to buy from Hoover’s or Dunn and Bradstreet is actually going to cost, but my guess is because you are able to narrow it down to a very, very small niche market and you are not actually asking for a lot of information, you could probably get that for a reasonable price.  Maybe a few hundred dollars; maybe $1,000 at the most.  But you are not going to pay more than a couple of dollars for each of these “leads”.  You’ll be able to identify where you can target those people.

[35:52] And from those lists that you get from those companies, you can send them targeted mailing and just simply address it to the shipping managers.

[36:00] Rob: Yeah, I agree with your assessment, Mike.  I don’t see social media as being a way to penetrate this market.  I can’t imagine that shipping managers are really online looking for Facebook groups.  I just don’t think it’s a group that is going to identify with that.  Typically, that kind of stuff works for more technical audiences or for hobbies.  It’s really good for that.  I agree.

[36:19] With that said, this is much less of an online marketing plane.  It’s more of a cold calling and direct mail, as you said.  So I think that’s a good recommendation.

[36:26] [music]

[36:29] Rob: If you have a question or comment, please call it into our voicemail number:  1-888-801-9690.  Or you can email it in MP3 or text format to questions@startupsfortherestofus.com.

[36:42] If you enjoyed this podcast, please consider writing a review in iTunes by searching for “Startups”. You can also subscribe to this podcast in iTunes or via RSS at startupsfortherestofus.com.

[36:54] Our theme music is an excerpt of “We’re Outta Control” by MoOt, used under Creative Commons.  A full transcript of this podcast is available on our website: startupsfortherestofus.com.  We’ll see you next time.