The success stories from mobile application developers making a six-figure income with little to no development expertise or input have created a phenomenon. Groups of people without development experience have feverishly outsourced their own mobile app ideas in hopes to make it big with a single hit. The one problem is that some of the largest venture-backed mobile start-ups are doing the same thing. They’re trying to make at least one of their applications take off, get general notoriety and hopefully make a profitable business out of it. The question is: how do you value and prep a mobile application to be sold for a profit?
Applications, very much unlike business valuations are a question more of time and cost to create the mobile app yourself versus buying it from someone else. It is often cheaper and faster to buy an existing application that does something similar to what you want from someone else for a smaller sum than it would cost for you to reinvent the wheel. It’s the all-illusive make vs. buy scenario. When you’re talking about speed-to-market, many acquirers may want something quickly while others will be looking for a good deal. What you are able to obtain is generally based on what the cost in both time and capital it would take to make the app without having to purchase it. If they want it done faster, they may be willing to pay a premium, but don’t count on it.
The second methodology used in valuing mobile applications is the traction and/or revenue the apps have already received. Some apps can go at least semi-viral very quickly. In this case, the app is generally worth a great deal more to a potential acquirer. In many cases, the application’s worth is based on the previous year’s revenue. Because app businesses are so fickle, it is difficult to gauge longevity on a mobile application and you have to go from the most recent history of the app. It could do better next year, but it could also be eclipsed and do far worse. That’s the risk mobile app buyers take when it comes time to acquire a mobile application for an app portfolio.
Several other important considerations should be taken into account when valuing mobile applications. Unlike full-fledged businesses, mobile applications are bought and sold with a much more short-sighted revenue multiple. For instance, while businesses typically trade at multiples of 2 to 10X of annual revenues, mobile applications generally trade on much more short time periods, typically 7 to 10X monthly multiples. This difference generally provides a big boon for investors looking to quickly recoup their investment quickly and mitigate risk.
Mobile app investors looking to mitigate risk will typically desire information on app-specific attrition rates. For instance, some apps tend to lose their street appeal more rapidly than others. Thus, the risk associated with investing in such apps is much higher. It is for this reason that app portfolio multiples tend to be less than a year. However, depending on the traction and stickiness of the application, some apps may have an attrition rate that lasts years, not just a few months. The great component for investors is that if you’re able to buy a portfolio of good apps, you mitigate your risk by investing in a pool and by taking such a short-lived revenue multiple.
It is important to keep in mind that mobile app investors are consistently on the look-out for different applications to further expand their market share and diversify their application base. Knowing what your mobile app is worth can at the least prevent you from being screwed and at the most give you a nice little payout for coming up with a great application development idea.
About the Author: Jon Castano is a DealCapital.com a specialist writer for general technology and software mergers and acquisitions in Austin, TX.