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How to Valuate an iOS/Mac App - [Apple Turnover #4]

How to Valuate an iOS/Mac App - [Apple Turnover #4]
By Alexander Greene • Issue #4 • View online
Welcome to the fourth issue of Apple Turnover! We’ve added a few subscribers since the last one, and I hope to say the same thing next week too. In this issue, I will:
  • Talk about valuating an app, from the buyer and seller perspectives.
  • Analyze My debts manager, a debt tracking app for iOS/WatchOS
As always, I’d love to learn more about you. If you’re interested in buying apps, or selling, reach out! Do you have any questions or feedback? You can email me or find me on Twitter
Alright, now for the good stuff…

How Do I Value An iOS/Mac App?
The short answer is, there’s no formula. There’s not really even a calculator that helps you get a rough estimate, like there are for other types of software (maybe I’ll build one?).
What I can share is what I’ve seen, and my process for thinking about this. As a developer and an investor, I’m not going to pick a side, but I’m going to talk about this fairly so that it applies to both buyers and sellers. I’m going to start with a high level view of what I typically see, and then we’ll dive into some specific factors that affect prices.
In general, apps will be sold somewhere between 1x - 5x annual profits. However it’s not uncommon to see apps listed for 10-20x annual profits. 
It’s kind of like eBay- you might see a bunch of listings asking $300 Buy It Now for the newspaper from a momentous day 20 years ago, but if you look at the completed sales, you’ll see the average sale price is more like $10.
The buyer pools for a 1x app and a 5x app are quite different, and that’s probably the most helpful framework for thinking about valuations. If you’re selling an app, you need to think about who might potentially buy it. If you’re buying an app, you need to think about who you’re competing with to acquire it.
The 1x apps are in need of a lot of work, or the revenue is low. Someone buying this is thinking about it more as a project. They’ll invest their own time into it, and expect to have it pay them back. At this level, the buyer pool is probably only developers, or someone who doesn’t really know what they’re getting into.
The 5x apps are in a really hot market, and they’re seeing strong growth. They’re making enough money to pay other people to work on it. Your buyer pool is a mix of owner-operator types, and investors who want to be in a particular space and will pay whatever necessary to get there. They’re prepared to have their connections put some fuel on the fire to make the app grow even faster.
I’m going to say a good starting point, before we’ve considered anything else, is 2.7x annual profit. This won’t cause any spit-takes on either side of the sale.
Now, let’s look at some of the factors that will push this up or down. This is by no means an exhaustive list, but they’re some of the first things I think about.
Predicted Revenue & Expenses
No surprise, this is the biggest factor. Unless the product is severely under monetized, or not monetized at all, most valuations are going to revolve around annual/monthly profits. So if we’re at 2.7x, and the app is profiting $10k a year, you’d likely find a buyer at $27k. 
That changes if the data shows this app is on a downward trend. Maybe the developer has been collecting profits for several years, but now they see the interest in their app waning. They’ve already got another project that requires their attention, and they’d rather sell than invest time into revitalizing it. The buyers now have an edge, because even keeping the 2.7x constant, what’s being multiplied is lower. So if we’re at 2.7x and the app has profited $10k, $8k, $6k over the last three years without plateauing, as a buyer I can reasonably expect it to drop to $4k and then $2k over the next two years. Now the conversation is closer to $7k.
Things also change in weird ways when you get into low revenue apps. If they’re in a really trendy niche, buyers seem to let that overwhelm them, and your valuation might get closer to 5x, because they’re planning for explosive growth. But otherwise, low revenue apps often go for smaller multiples to account for the time the new developer will put into them.
If the revenue is really, really small, you have another dynamic at play. You see this on Flippa all the time. It ties back into thinking about the buyer pool. When an app is making $5 a month, it’s not going to sell for $162. At that price, your buyer pool is a bunch of folks who want to try their hand at investing in apps and like to see something that is making any amount of money, but also don’t want to risk a lot. I wouldn’t be surpised to see the price bid up to $1000, which would be pushing a 17x valuation. Ha!
Current Visibility
How many eyeballs are on this app? Is it ranking high in app-store searches? Does it have organic traffic, or has the current owner figured out a cost-effective advertising strategy? When I’m looking at a deal, this carries a big weight. I can expect improvements I make to the app to be appreciated quickly and see a better return on my time invested. As a seller, you want to highlight this to potential buyers, and as a buyer, you want to look for sellers who don’t appreciate this as much as they should.
Alternatively, if the app is in a very crowded niche with a lot of competitors, and very little visibility, that could draw down the valuation big time. If existing revenues came from promotions or features that are unlikely to re-occur, the valuation can take a big hit.
Expected Workload (For Improvements & Maintenance)
If you’ve spent any amount of time researching ways to invest in software/websites you’ve probably heard the term “passive income” quite a bit. It’s an attractive idea, but the reality is that there are very few ways to earn long-term passive income at a high rate of return.
That said, there are apps that require more work than others, and the amount of work will dictate whether an app is worth more or less. It’s also really important whether the expected workload is necessary or not. As a potential buyer, you might a ton of great ideas for how to improve the app and will want a valuation that reflects the time you’ll put into it. But if the app doesn’t need improvements, you’ll be competing with buyers who are happy letting it sit as is and wont be factoring time into their acquisition offers. As a seller, you’ll want to find the buyers that have some great ideas for improvement, and encourage them to factor their time cost into future earnings potential, not current valuation.
Tech Stack
This is someone I probably value more than others. Context switching takes time. Learning a new technology takes time. For some, acquiring an app that has interesting tech stack or unfamiliar technologies could be a bonus. When I look at potentially acquiring something, I want to be able to make changes quickly.
For an app making significant revenues, it shouldn’t raise any eyebrows that things are more complex. But if the app is making a couple thousands dollars a year, or less, I don’t like to see:
Java, Spring Boot, AWS (S3, ElasticBeanstalk), Docker, AngularJS, MySQL, React Native, Android
This specific example is not from an iOS/Mac app, but the point stands. Each extra thing on the stack is another thing to familiarize yourself with, another thing to spend time on, and potentially an actual expense. My thoughts on cross-platform apps are similar. For a low-revenue app, I don’t want to manage an iOS version and an Android version. Not every buyer will feel this way, but it will definitely affect the size of the buyer pool, and potentially the valuation.
Room for Improvement
Buyers like to see a competitive advantage with a potential acquisition, but even more, they love to see where they can strengthen or add a competitive advantage. If a buyer doesn’t see how they can lend their skills to make an app better, or more profitable, the multiple they’d be likely to pay will be lower. If they can identify an immediate impact they can make, the multiple could go higher. For example, if they have a large audience, they might feel comfortable paying more because they’re confident in their ability to quickly market it to a large pool of potential customers.
Reason For Sale
For some reason or another, the current owner of the app is selling, and that can affect the valuation multiple. If a buyer has reached out directly and wants to buy your app, the multiple could be higher. If a seller needs to sell ASAP, the multiple will be lower, because they are more interested in selling quickly than finding the best deal.
To Summarize:
Valuating an iOS/Mac app is difficult. There’s not a big data set of comps. You can scroll through the completed listings on Flippa, but there’s a lot of noise in there. Hopefully some of these factors I’ve mentioned give you an outline for what to think about when you’re buying or selling an app. 
This won’t be the last time I write about valuations on Apple Turnover, but the most helpful notes I can leave you with here are:
  • Whether you’re buying or selling, really think about the buyer pool. It will help you better price your app, or better understand who you’re competiting against to buy one.
  • Build your own buying criteria. Every reader will have a different take on the factors I’ve mentioned above, and will have their own factors that are important them. Figure out what those are so that you know you’re comfortable with a potential investment, regardless of who you’re competing against.
Acquisition Opportunity: My debts manager for iOS
This issue, we’re going to be taking a look at an iOS app for sale, called My debts manager.
What Is It?
My debts manager is an iOS app for keeping track of debts you owe, or are owed.
Why Is It Being Turned Over?
The seller has listed need money as the reason for the sale.
Listed on: Flippa
Asking Price: Auction started at $3,000 with a $5000 reserve.
Annual Profit: about $1000 
Recurring Expenses: Small PHP backend with a SQL database to backup customer data.
What I Like About This App
Easy Wins. There are so many small improvements to be made here, I could write a whole list. The great thing is that they’re small changes. Things like alignments/spacing or updating copy that is grammatically incorrect and might turn away folks in the US app store. 
Good Ratings/Reviews. This app has great ratings, and the reviews tell me that people are choosing to rely on this app over many years to keep track of debts. I love that.
Ranks… okay. For the search term “Debt Tracker”, this app ranks #20, for the term “Track Debts” it ranks #70. Now, these aren’t great, but they’re also not bad. There are a lot of competing apps, with a wide variety of feature sets: everything from budget trackers to automated expense tracking. For someone who wants a very simple, focused way to track debts/loans, I could understand scrolling down that far to find the one that looks like a best fit, and I think these ranks could be improved. The app is 8 years old, which is a very long time for an app. I’m not sure if that helps the ranking, but it doesn’t hurt.
Low Maintenance. There are only a couple screens in the app, and users seem overwhelmingly happy despite the lack of features. That’s great.
Stable Profits. Monthly proceeds waver between $60-100, and seem stable over the past year.
Watch App Included. It adds minor maintenance to the app, if any, and is a great competitive advantage.
What I Don’t Like About This App
Current Valuation. The reserve price of $5k is too high. I don’t think it will reach the reserve, and I’m expecting it to go to best offer after the auction closes. I’m not hunting for an acquisition right now, but at $1k I would be a buyer. I think someone will buy this at $2k.
There’s a Backend. There’s a small PHP backend running on the owner’s private server, which is used for the data backup feature in the app. The transfer process for this is going to be a bit tricky. If the transfer of the database goes fine, you’re still going to have to wait for Apple to approve an update to the app that points to the new server. So it’s going to be broken feature for a bit.
Easy to build from scratch. At the current valuation, it would be a better deal to rebuild this app from scratch.
Who Should Acquire This?
  • Someone looking for an app that needs minor improvements.
My Recommendations
At the right price, I would be a buyer for this app. Here’s what I would do if I acquired it:
Increase the Price. The app is currently free with a $1.99 in-app purchase. I would experiment with increasing it to $2.99 and then $3.99 and watch how it affects purchases. Someone who has downloaded this app has already chosen it over a long list of alternatives, so 2.99 vs 1.99 is not likely going to make them change their mind.
Accomplish All of the Easy Wins. There are a lot of minor improvements I would make. Some of them are:
  • Update all of the In-App copy/wording to be grammatically correct, and localize it for different markets. Capitalize words that should be capitalized.
  • The ellipses is over-used and confusing to a new-user. In one spot it’s a menu button, in another it’s a page indicator. I would pick a better menu button and show all of the loan amount / borrowed amount info at once, rather than requiring the user to swipe through several pages.
  • Make it clearer what can be edited. There’s a dollar sign button that looks like it would let me change the currency, but I cant change it.
  • The spacing/alignment everywhere can be improved.
Improve the App Store Profile. The first screenshot should be a video demo of the app, and the others could stand out a bit more. The screenshot for the watch app is a bit disturbing, to be honest. The description should be re-written, and the title/subtitle/keywords should probably be optimized.
I really hope this was a language barrier issue, or a dog is wearing this watch...
I really hope this was a language barrier issue, or a dog is wearing this watch...
Remove the Backup Server. I would kill that feature. There are already some export options within the app, but maybe add another that lets you export all of your data to a CSV. Another option is to use iCloud, but keep in mind that would prevent you from easily transferring/selling this app in the future.
There are a bunch of great improvements you can make past this point, but those will probably give you the best and most immediate return on your investment.
Was this helpful? Was it interesting? Please reach out and let me know, and thank you for reading!
Alex
Did you enjoy this issue?
Alexander Greene

Hello Readers, thanks for tuning into Apple Turnover. Are you an iOS/Mac app developer or entrepreneur interested in acquiring apps?
Each issue, I'll be reviewing a selection of app investment opportunities sourced from public marketplaces, and private conversations. I won't just be analyzing financials. As a developer & designer myself, I'll review strengths and weaknesses of each opportunity from technical and design perspectives.

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