My Accidental Entrepreneurship - Building With the Exit In Mind

From the beginning, I knew this business wouldn't be what I would be working on for decades. Regardless, I wanted to push it to its limits, exhaust this niche market, and only start working on something new if there was no more place to grow.

The dreaded plateau

At the outset, the business was thriving. The monthly active user (MAU) count steadily increased, with occasional exponential jumps. Our trial conversion rate (TCR) was consistently above 50%. However, the first sign of trouble appeared when our MAU decreased slightly, and our TCR dropped below 30% for the first time.

I was prepared for a potential setback as I closely monitored my biggest competitor's moves. They made a significant shift, abandoning their previous expensive pricing model and creating a new one similar to mine, with the lowest tier matching my price. They could offer additional features because they are directly integrated with the accounting software. Other than that, our value proposition was the same.

At first, I hoped that it was only temporary. My customers and potential customers may try the other product but won't be satisfied enough to stick with it.

As mentioned in my previous article, I was at a considerable disadvantage on the marketing side. My competitor's ad was shown after every update in the accounting software, and they could send direct emails to the whole user base. They started to use it more intensively.

My TCR recovered to the previous levels. However, the number of new sign-ups decreased, and MAU remained constant.

I was looking at my analytics and saw the plateau forming. It's one of the worst things an entrepreneur can see. Sustainable growth is good, but halting it can quickly lead to a downslide and the end of the business.

Light ahead - Generated with DALL·E

Addressing the issue

I had to evaluate my options. I had exhausted every possible marketing channel, and the target audience was too small. Trying to level up marketing was not a good idea. I needed to appeal to another audience.

I started to work on building integrations with different accounting software. Although the number of users of these software was smaller, they were also less price sensitive, as these were much more expensive solutions. So, I had to reverse-engineer another set of databases, build the integrations, and explore ways to get into the new audience.

The work then I did paid off in an unexpected way later.

Acquisition?

Three months into the plateau, my phone rang. My competitor was calling. We had been in touch since the start, talking a little about potential collaboration (that I did not want as I preferred to make every business decision by myself) or acquisition (which I preferred) at least once a year. Previously, the price tag they suggested was always an order of magnitude less than what I have valued my business at. This time, they asked me to calculate a fair value, believing we could agree. When I had put down the phone, I was happy for a minute about the opportunity, but then I realized that I needed to be highly vigilant about every step, as every tiny mistake could reduce the last price by tens of thousands of euros. I needed a plan.

The plan

I started by reading up on business valuations. Unfortunately, I found hardly anything relevant to the size and type of my business. My software was more like a plugin with significant risks. There was always the concern that a slight change in the tax regulations or the closing of the import feature in the accounting software could instantly decimate the whole operation.

However, I was confident I had at least three more years at the actual revenue level, given that my backup plan worked and there wouldn't be any black swan events. So, my baseline was three times my annual profit.

First and foremost, I followed the advice I read in Built to Sell, wrote down the last price I would be satisfied with, and put it in an envelope.

I knew that even though we would be negotiating about the price a great deal, the first number I present will act as an anchor. I was highly confident I wouldn't get more than that.

Understanding My Competitor's Perspective

So, I had my range, but what about my negotiation partners'?

They would acquire my business mainly to eliminate the possibility that I would one day overtake them in our segment. I anticipated they would want to see a return on their investment in a few years. I ran my business at a low cost, so my profit rate was high. They had a lot of employees and a more mature company structure. I knew that the way we look at the business would be different.

Different ways of calculating the business value

I opened the negotiation with a price slightly higher than I calculated, as I understood that whatever I said would define the top of the range. After signing a Non-disclosure agreement, I presented some metrics about my company for the last year. These included the MAU, the monthly new sign-ups, and the cancellations. For a while, we couldn't agree on the business value. Then, I asked my competitor to show our cards and tell each other what method we used to create our numbers.

It turned out that they used the churn rate to calculate my users' lifetimes and multiplied it by the number of users and the monthly subscription fee. Thanks to the months when they changed their pricing, my churn was relatively high. They had no intention of growing the number of users of the product but instead diverted them to their own, so applying multiples was out of the question. Although it was above the number I had put in my envelope, but only by a little, so I refrained from accepting it.

After some clarification and calculations on the additional business values, like the users of simpler products, an unreleased integration with another software (remember my plateau mitigating strategy?), and the potentially necessary development work, they made an offer I happily accepted.

It was a rollercoaster, and part of me just wanted to get it over with, while the other part urged me to slow things down. Being patient and keeping the conversation going helped us see each other’s perspective.

Finalizing the contract

From that point, things were still to discuss, such as the vested amounts during the handover period. I thought it would be easy since we both wanted to finish the process immediately. I had read about the other’s experiences and how this could take additional months.

I thought: not me, not us, we can do it in a week. It took another two months to get to the final version of the contracts, thinking about everything that could go sideways. Our lawyers couldn’t agree. We couldn’t agree. We had other work to do.

I mentioned the rollercoaster before, but this time, it got intense as days passed while I contemplated backing off the whole thing altogether. Almost half a year passed, while my main focus was negotiating the deal and not growing the business.

I communicated my frustration and transparency helped us overcome an impediment once again.

Closure

Even though I always considered the possibility of selling the business, it was hard when it finally happened. The silence was deafening after I handed over every account and got locked out of the customer service emails. My mind kept wondering about potential ways to grow the business and improve the product, and I constantly needed to remind myself that it was no longer my concern and that I was free to do whatever I wanted to.

During my accidental entrepreneur journey, I learned much about pricing models, marketing, sales, and software development difficulties. I got to talk with my customers every day, which helped me enhance my empathy. I learned the true meaning of self-motivation when no one else urged me to work. I learned a lot about myself.

I am sharing my journey and giving you a glimpse of what it means to create a software business. With this, I conclude my articles about this period of my life. Now, I have my closure.