How and Why I Sold My Software Company, Long Tail Pro
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Today, I want to publicly share for the first time that I have sold my software company, Long Tail Pro.
In February of this year I sold a majority share of the company for a significant sum of money, the kind of exit that can have a big impact on one's life.
I want to share how and why I sold the company in order to both educate and inspire potential software entrepreneurs. I certainly don't know everything and obviously companies sell for much more than I sold Long Tail Pro for (I won't be featured in Tech Crunch anytime soon); however, I'm willing to share what I have learned and hopefully that can be beneficial to a few of you.
How I Built the Company…
I've shared the history of Long Tail Pro and the genesis of the idea for a better keyword research tool on my blog a few times. In particular, for the history of the company up to 2012, you should read this blog post and for a good overview of how I bootstrapped Long Tail Pro read this one.
However, in a nutshell, I came up with the idea for a better keyword research tool because I was building lots and lots of little affiliate sites for myself, and needed a way to find and cherry pick easy to rank for keywords much faster than existing software would allow.
In other words, I had a problem in my own business, and then I built a piece of software to fix that problem. I think there can be a lot of advantages to coming up with a software idea that will “scratch your own itch.”
Because I was not only the business owner, but also the end user, I was able to develop an excellent product from the stand point of potential customers without much feedback from them. I understood the target market on a very deep level, because I was one of the users in the target market.
I'm not a programmer
I should also be very clear, that I am not a programmer. I did not code a single line for Long Tail Pro. I am living proof that you don't have to be a coder in order to build a successful software company and have a significant exit.
So, how did I build a successful software company when I'm not a developer? I outsourced.
I've written about how I hired and the mistakes and successes that I had with programmers in an in-depth blog post right here.
I basically made the mistake of hiring a really cheap developer and things did not go well at first. The product was working long enough for me to start selling it and validate the market. But after about 2 weeks the software “broke” and I had to go back to the drawing board.
After having my source code held hostage by the original programmer, I made the decision to find someone new. This was one of the best decisions I ever made, and this new developer stuck with me until the company was sold.
I could also go into great detail about how I launched the company and have grown it over the past 5 years. However, I'd like to focus primarily on the sale of the company and the details behind it.
In general, the business was a success because:
- I introduced a better software offering that the market wanted
- I openly shared case studies about keyword research
- End users regularly found success with the software and shared their testimonials and case studies freely
- I constantly provided value through blogging and podcasting to build my audience
- I picked up a few great affiliates primarily through my blogging/podcasting contacts
The Hard Work Pays Off
I've never openly shared how much revenue and profit Long Tail Pro was making as a company. However, now that I've sold most of my ownership stake I'm willing to share a few more details.
Hopefully this kind of data is beneficial to someone considering starting a software company. Below you will find a graph of the revenue and net profit of the company on an annual basis since the company was started.
The revenues in 2011, the first year of the business, clocked in at about $44,000. Both revenue and profits have increased each and every year that I've owned the company.
I've always been 100% owner of the company and so it certainly feels good to look at a 5 year graph and see the growth that has been achieved. I fully expect the new ownership team to continue the growth trend for Long Tail Pro.
The Story Behind Deciding to Sell
Deciding to sell the company was not an easy decision. And in fact, I hadn't 100% decided to sell the company until I received a great offer.
Here's the story behind how and why I came to the decision to sell Long Tail Pro.
When you have lived through a number of major Google algorithm updates, like I have, you are constantly thinking about what the worst case scenario is. Long Tail Pro is a software that has to be constantly updated to keep up with changes made from Google.
After 5 years, I started to think that perhaps it would be smart to take some risk off the table. The risk of Google changing something that I couldn't fix. Or there could be other “black swan” risks that I just don't know about.
In addition, as you can see, Long Tail Pro has always been profitable and financially has a great business to me. However, after running a business for 5 years, the excitement starts to wane a bit. I was becoming less motivated to run the same business day to day by the end of 2015 as I had been since early 2011.
(Luckily, I had hired Jake Cain to help keep the company moving forward and 2015 was the best year ever for the business. Jake continues to work with me as employee on Amazon FBA, websites, and other projects…but is no longer involved in Long Tail Pro post-sale).
So, for these 2 reasons: taking risk off the table and I was just ready for something new was what made me start thinking about selling the company.
Now enters, Rhodium Weekend.
Right about the time I started thinking about selling, I was planning to attend Rhodium Weekend in October 2015. Rhodium primarily is geared towards people interested in buying and selling web properties. I've attended a couple of times and its a great conference run by Chris Yates.
Chris is someone that has bought and sold lots of web properties and is well experienced in the area. I reached out to him privately before the conference and simply said, “Hey, I'm thinking about possibly selling Long Tail Pro someday…any advice?”
One thing led to another, and Chris eventually invited me to share some details about Long Tail Pro at the conference in front of a few web brokers for a mock valuation session.
Again, this was a “mock” valuation session, and I still really had no intention of selling the company. However, after the conference I started getting people contacting me saying they were interested in buying my company!
In particular, 2 potential buyers were very interested and wanted to talk numbers. One of the potential buyers (the one that eventually bought the company), hadn't even attended the conference, but had heard through the grapevine that I might be selling.
I still hadn't really decided to sell the company and had never officially listed it for sale anywhere. However, as I discussed details with the group that eventually ended up buying the company, the more I warmed up to the idea.
The Process of Selling the Company
One of the main reasons I went from being unsure about selling the company to feeling confident about selling the company was due to the potential buyers. I had known the potential buyer for over 3 years and we had done many business transactions in the past.
This was a close online business associate that I was confident would take good care of my company. As he shared more details about his ideas for growing the company, I could see that we were on the same page and this pushed me over the edge about finally letting go of my company that I had built from the ground up.
Here's some of the strategies that I wanted to implement before selling Long Tail Pro:
- Take the business to a full SaaS model (make all plans monthly or annual rather than one-time payments)
- Transition from a desktop application to a full online tool
- Improve/Add rank tracking
- Add additional features/tools to help content marketers (I had several ideas here)
After discussing these points with the potential buyers, these were the exact strategies that they saw to improve the business as well. Knowing that they shared the same strategic outlook that I did, really made me more comfortable with the sale.
Here's a quick breakdown of the process involved when selling the company:
- I had to gather 3 years of detailed financials – profit and loss statements primarily
- I went back and gathered even more statistics until they were completely satisfied
- They proposed a purchase price and we negotiated price and other details (selling financing, remaining ownership, etc).
- A Letter of Intent (LOI) was drafted and signed (with the help of attorneys)
- I provided logins or screenshots to various pieces of the business to help the potential buyers with their due diligence
- They continued their due diligence for about a month, and I answered LOTS of questions
- After they were satisfied with due diligence, a purchase agreement was drafted
- We spent weeks going back and forth with attorneys and each other to negotiate/edit each point of the purchase agreement and other documents
- On Feb 1st, 2016 the purchase agreement and other documents were signed and the agreed upon portion of the funds were transferred to my bank account (woohoo!)
- The buyer is actually a private equity group with 15 total investors
I have to admit that I was sick of talking to my attorney and accountant after this period of time, but obviously these are critical components to selling the company. There are lots of legal and tax implications and I wanted to make sure that I had advisors looking out for my best interests.
I was very happy with the transaction, and I know that the buyers were as well.
A Few Other Details About the Sale
The final sales price was based on a multiple of trailing 12 months net income (i.e. The average net income over the most recent 12 months). I feel like I got a very good multiple. I had talked to the brokers at FEinternational, Quiet Light Brokerage, and had viewed sale history of other similar companies, so I know the price I received was very competitive.
In addition, what really made me happy about the deal was that I was able to keep 20% ownership of the company. So, I sold 80% of the company, but get to keep 20% on a more passive basis going forward.
I felt like this was important for me because I still believe in Long Tail Pro and see tons of growth potential. This allows me to hand off the day to day operations to someone else, but still enjoy some of the potential upside.
I was paid approximately 2/3 of the funds upfront and will receive about 1/3 over the next 2 years. It's now been almost 7 months since we closed the deal, and I've received the first couple of seller financing payments for that final 1/3 on time and am very confident that will continue for the next year and a half until I'm fully paid that final portion.
In addition, I still own 20% of the company, so I continue to get dividend payments on a regular basis for that remaining ownership percentage (on top of my seller financing payments). Then of course, if the new buyers decide to ever sell the company after they take it to a new level, I will get 20% of that future exit.
Overall, I'm very pleased with the deal.
My Role at Long Tail Pro
So, you may be wondering how involved I am with the day to day operations of Long Tail Pro. The truth is that I am no longer involved very much in the day to day operations of the company.
For the first few months, there was certainly a transition period. However, the new team was able to take over the reigns fairly quickly. A big reason for the quick transition is because I had automated most of the business already. So, the fact that I was stepping away didn't make a huge difference since all the sales, marketing emails, and many other details were already happening on an automated basis.
As part of the deal, the new team wanted full control over the company. And this is the way it should be, the new team has their own vision and goals and is in full control of Long Tail Pro. I still offer strategic advice when asked or may point certain things that I notice in the business, but in general, I'm no longer operating the company.
So, this is the reason you won't see me in the Long Tail Pro Facebook group answering questions or answering support tickets. This actually is very smart in business terms anyway. A company is much more valuable if the original owner is not the sole face of the company.
Long Tail Pro is more valuable if it is not dependent on my reputation. As a result, I am no longer involved in the day to day operations of the company.
As mentioned, I no longer have any major responsibilities at Long Tail Pro. I do have some ongoing commitments related to blogging and mentioning Long Tail Pro on NichePursuits.com, but these are very minor in terms of time.
Right now I am mainly focusing on creating and launching physical products to sell on Amazon. I've shared some of my income reports from my Amazon FBA business in the past, and I'm still very bullish on the potential here.
I've launched several products on Amazon since selling Long Tail Pro and expect to launch several more before the end of this year.
In addition, I continue to grow my affiliate website portfolio and have invested in a few sites. I still really enjoy seeing these websites climb the ranks in Google.
And finally, I am starting to get the itch again to start a new software company. I wanted to take a bit of a break after selling Long Tail Pro before diving right into another software project. So, now that it's been about 7 months, I feel like maybe I should start the process once again with a new product that is exciting to me.
In fact, last week, I just spent a few hours talking to my developer that helped me build Long Tail Pro and discussed a new potential software idea with him. This idea may or may not come to fruition, but I definitely see myself getting back into the software game in the next 12 months.
I just feel like I've learned SO much in running my first ever software company, that it would almost be a waste of all that education to not start and run another software company.
Or maybe I should just take a few extra months off and enjoy the time with my wife and 4 kids!?
Either way, I really like the options exiting my software company has provided me.
I truly hope that some of you out there reading can learn a bit from my experience and feel inspired to go out and create something great that can provide you with lots of amazing options.
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