Apple’s iOS App Store kickstarted one of the largest gold rushes in software history. The estimated 4.2 million apps released on iOS since 2008 have collectively earned over $600 billion in gross proceeds. Multi-billion dollar companies—Uber, Snapchat, Tinder, Venmo, among others—have built entirely new industries around apps.
Yet the biggest winners from the iOS App Store are arguably independent (“indie”) developers: more than 80% of app proceeds accrue to the “long tail” of developers who earn less than $5 million per year. Thousands of indie developers have turned niche products like health trackers and guitar tuners into life-changing businesses.
But after nearly 15 years, iOS is transitioning to maturity. Fewer new apps being created, alongside slowing growth for existing apps, marks a gradual shift from inventing to maintaining. A key sign of this shift is the growing number of indie developers, such as AllTrails and Day One Journal, who have sold their apps.
Business owners sell for many reasons. Boredom, freedom, income diversification, life events, slowing growth, and, of course, the financial upside from a multi-million-dollar cash exit, are typical factors. With apps, we’ve seen some sellers focused on downside (such as volatile search algorithms and getting “Sherlocked”) and others focused on upside (such as collecting years of cash upfront to fund new projects).
At Applause, we realized that there isn’t much information available to guide app owners through the sale process. We first learned that as indie developers when selling our own apps in 2018, and more recently, as buyers of other indie apps.
We’ve written the Ultimate Guide to Selling Apps as the guide we wish we had when we sold our own apps. We’re light on platitudes and heavy on details, covering every step from the first intro meeting to the final purchase agreement. If you've wondered about the differing tax treatments of asset versus stock purchases, what conditions to watch out for in an LOI, how buyers calculate multiples, and how to know if those multiples are negotiable, then this is the guide for you.
Why are we sharing this?
While we’ve switched from building to buying apps, we’re committed to establishing more transparency in this process for everyone. Buyers and sellers both benefit. For buyers, we hope that this sets the standards for reasonable terms and conduct. For sellers, we hope that this demystifies an otherwise-intimidating process. For us, we hope that this can be a reference for the indie developers who work with us. And of course, we hope that it inspires some of you to reach out.
Let’s dive in.
The sales process has five major steps: introduction, review, offer, diligence, and closing. With the caveat that every buyer is different, the central themes and key considerations below should be universally applicable.
Conversations usually start with a cold inbound or a warm introduction. While we’re (admittedly) biased on this, we think that it's always worth taking the conversation. Even if you have no plans to sell your app, it can’t hurt to meet someone new in the iOS ecosystem and get a sense of what your app could be worth. A short intro call, or even just emails to ask them questions, can provide you useful info for no effort.
The first step is usually a short intro call with the buyers. They will be ask high-level questions to understand if your app fits their main criteria. Every buyer is looking for different characteristics, so it's best to answer honestly without sugarcoating. Some common questions include:
The intro meeting is the easiest part of the process because it requires almost zero preparation. The capital structure is whether there are other shareholders and if the business has any debt. The domicile is the country in which the app is incorporated (being in another country from the buyer can sometimes add to deal complexity).
The main question to think about beforehand is your asking price. What price would you sell at? This isn't a trick to get you to make the first move in negotiations, it’s to ensure that you have reasonable expectations about price. Buyers will be reluctant to review an app and extend an offer if the owner expects to sell for (say) over 10x earnings. You don’t need to answer with an exact number, but it's good to say that you're comfortable with typical deal multiples (see Factor 3: The Multiple below).
If you have no price in mind and don’t want to sell today, then that's fine! Plenty of app owners don't want to sell right now. We fully understand. Buyers may still offer to review your app and give you an offer just in case you’re interested in the future.
But even if you don't want to sell, the app review is valuable (if nothing else) to hear some new perspectives on your app. As a general rule, though, being upfront about your openness to selling is key—if you're interested in selling, say so! Pretending to be uninterested could backfire if the buyer decides not to review your app.
This is also a chance for you to ask some questions. During your intro conversation, we'd recommend asking prospective buyers the following:
These questions serve as basic screens on if this is a buyer that you’ll want to work with (for more info on the different types of buyers, see Factor 1: The Buyer below).
Past acquisitions are helpful to understand their transaction experience and to get seller references. The technical team’s iOS experience is crucial—if they outsource daily operations to contractors, or their lead engineers have limited iOS experience, this is a recipe for disaster. If you have any doubts, you should ask to speak to their CTO. For the process, timeline, and deal multiples, it can be useful to compare their answers with this guide and ensure that they match market conventions.
After the initial conversation, the buyer will want to review your app’s financial and operational metrics. Most often, this can be done by adding the buyer as a financial user in App Store Connect. Sometimes, the buyer may want to review data in Apple Search Ads, RevenueCat, Mixpanel, Firebase, and other related third-party tools (at Applause, we can complete our initial review with just App Store Connect). If you’re hesitant about sharing sensitive data, you can always ask the buyer to sign an NDA.
The purpose of this review is to cover the key data points required to make an offer, like trends in impressions, downloads, revenue, return on ad spend, user retention, and more. In contrast, the post-offer diligence process is “confirmatory,” serving to verify that the high-level analysis from the pre-offer review was correct.
Compared to nearly all other small businesses, the review process for mobile apps is incredibly simple due to their digital-first nature. Buyers can view most required data instantly using tools like App Store Connect, and sellers can receive an offer in just a few days without lifting a finger. It definitely beats brick-and-mortar due diligence.
The one piece of external data that buyers will likely ask you to prepare is a simple income statement, also known as a profit and loss (P&L) account. Buyers will need your detailed expenses (on a monthly basis) over the past three years to estimate actual earnings. Among others, make sure to include the following expenses:
· Paid marketing (ASA, Facebook, etc.)
· External agencies (ASO, design, etc.)
· Labor (employees, contractors, etc.)
· Third party tools (e.g., RevenueCat)
· Web domains, hosting, and servers
It's crucial to know your approximate earnings before the buyer makes an offer, as their offer will be based on your estimated earnings. If the buyer uncovers further costs during due diligence, they will, at best, renegotiate the offer to account for these costs. At worst, the buyer could walk away due to concerns around other undisclosed costs. Buyers will verify expenses in multiple ways during diligence, including (in some cases) an audit, so transparency is always the best strategy.
After a week, the buyer will share their proposed offer as a “letter of intent” (LOI) to acquire your app. If you receive an LOI, congratulations! Not everyone gets an offer, and you should be proud of having created a business that not only users, but also investors, are excited about.
The LOI is a non-binding offer (or term sheet) that outlines the key terms of a proposed acquisition. These key terms will be reflected in an actual purchase agreement that is drafted and reviewed in the days following the LOI signing.
Some of the most common LOI terms include:
Unsurprisingly, LOI negotiations center on the price and structure. Sellers always want a higher price and more cash upfront. Buyers, of course, want the opposite. There is no harm in negotiations. Getting creative with earnouts, in particular, is an excellent way to bridge the gap on price, especially when this gap is from different opinions about durability and upside (for structuring ideas, see Factor 4: Structure).
In our experience, however, it is rare to bridge a price gap of more than 20-30% if the buyer’s price is in line with the market. Buyers are very hesitant to pay above-market multiples because they often have several acquisitions under consideration at the same time and don’t mind ditching deals when sellers want unrealistic prices.
Your app could absolutely deserve an above-market price. But in order to know that, you have to have a clear sense of what market prices are and how those prices are determined (for more on market prices, see Factor 3: Price). In order to persuade a buyer to pay above-market, you'll also need to speak their language—being able to reference market prices and negotiate based on your app's above-market qualities is a much more effective strategy than insisting on a price without a clear rationale.
What about asset purchases versus stock purchases?
Sellers are sometimes concerned with whether the deal will be an asset purchase agreement (“APA”) or a stock purchase agreement (“SPA”). Asset purchases involve buying the assets (i.e., the apps and any related domains, accounts, etc.) whereas stock purchases involve buying the stock of the company that owns the apps.
APAs are the standard structure for all small business acquisitions because of their simplicity: the buyer acquires everything they want (the assets) and leaves behind unknown the tail risks from liabilities (pending litigation, vendor contracts, unpaid taxes, etc.). The seller also benefits from a simpler diligence and closing process.
From a tax perspective, sellers are usually indifferent between asset and stock sales because both are treated as capital gains in the specific context of iOS mobile apps (this is not tax advice; please consult with a tax advisor). But even in rare situations that result in some ordinary income treatment for sellers, it is an uphill battle to get SPA treatment because the potential liabilities for the buyer with a stock purchase far outweigh the potential tax benefits (if any) gained by the seller.
We have known buyers who abandoned deals due to seller insistence on an SPA because their financing partners forbade stock purchases. If you really care about the tax savings (which, for sellers, are generally 0-10% of the deal value), then you should be prepared to offer large carveouts for liabilities in the SPA, to or lower the deal price materially to compensate the buyer for greater risk of unknown liabilities.
Another term that sometimes causes confusion for first-time sellers is subordination. If the buyer has a lender, and if your offer includes a deferred component, then their lender will require a subordination clause. In basic terms, subordination means that, if the buyer goes bankrupt, then the lender is repaid before the deferral is paid.
Bankruptcy is a scary word, but this risk isn’t nearly as scary as it sounds. This only matters if your buyer goes bankrupt before they make your deferred payment. This risk is already very low for well-funded buyers (and it's a good reason to work with institutionally-backed buyers like Applause). To be extra safe, you can determine if this risk is (nearly) zero by asking: “what is the maturity date on your debt?” If your deferred payment is due before the lender’s maturity, then you’re likely in the clear.
The other terms are rarely sticking points if they're in line with market conventions. The typical diligence period is 30 to 60 days, and the exclusivity should be a similar length. Buyers ask for exclusivity to ensure that they don’t spend time on diligence while the seller looks for a better offer, but exclusivity periods can be abused if the buyer ties up the app for longer than is necessary for diligence (anything above 60 days is a red flag). The transition period is usually 6-12 months, depending on the operational complexity. Buyers will also usually ask for a non-compete on the app.
The most under-appreciated feature of the LOI is the buyer. Is this the kind of buyer that you want to own your app? Do they have a great team to improve the app? Are they well-suited to meet earnout targets? Is there another buyer that, all else equal, you’d rather work with? Price isn’t everything, and all buyers aren’t created equal. If you’re unsure, ask them for references (for more on buyers, see Factor 1: Buyer).
The post-LOI diligence process is confirmatory. The buyer will seek to further verify information from their review (e.g., ensuring that revenue, expenses, and other data are accurate), while a purchase agreement reflecting the LOI will simultaneously be prepared and negotiated. If you’ve signed an LOI, then the hardest part of selling is (hopefully) already over. Diligence and closing should be relatively smooth sailing.
What does post-LOI diligence involve? Here are some items that buyers will check:
These documents are relevant for APAs. For SPAs, the diligence list will be broader (including, for example, the certificate of incorporation, the status of tax payments made in the past three years, and detailed questions about any potential liabilities) because SPAs involve taking over both the assets and liabilities of the seller (for a more detailed discussion, revisit Step 3: Offer).
For larger apps, the diligence process may also involve an audit. The audit process should be short (usually only 1-2 weeks) and involves reconciling bank statements with reported income and expenses as a secondary check on the app’s underlying earnings. The most common issue that tends to arise during the audit is when the bank accounts for each app (or for the company and the owner) are intermingled. This can unfortunately be a deal breaker: without clearly-segmented revenue and expenses, it's impossible for the buyer to be confident in your estimated earnings.
So diligence is straightforward enough. But what about the purchase documents?
Concurrent with diligence, the buyer will share proposed purchase documents. At this stage (if you haven’t already), you should hire a transactions lawyer. The best lawyers are those who have done small business transactions with digital assets, commonly with websites. You can find a qualified lawyer through UpCounsel, and we recommend reaching out to 3-4 lawyers to have some points of comparison.
We're not fans of lawyers either, but in this case, they're worth it. You should expect a cost of no more than $500 per hour and perhaps 10-20 hours of work (absent any complications). It’s well worth the cost: $5,000 to $10,000 is a small price to pay for greater speed, certainty, and clarity in a such financially consequential transaction.
Purchase agreement negotiations should be smooth if the agreement reflects the key terms in the LOI. The buyer’s counsel will share the draft purchase agreement with your lawyer, who will compare it with the LOI and make “red line” changes to improve the terms for you. There is usually 1-2 weeks of back-and-forth on edits before the documents are finalized.
The biggest red flag at this stage is any attempt to re-trade terms. Absent a major negative finding in diligence, the purchase price and terms shouldn’t change. While this is mainly a risk with buyers, this red flag is worth keeping in mind for your own actions—we've seen deals fall apart after sellers tried to raise their purchase price.
Even if the documents are reasonable, lawyers will always want to find something to negotiate (they have to keep up appearances!). One easy spot for lawyers to make a fuss is with “indemnification buckets.” These are the costs for which the seller must reimburse the buyer (usually netted out of the deferred payment) in the event that the costs arise post-closing, like litigation related to IP ownership or unpaid taxes. Indemnification buckets are more complex for SPAs because the buyer is taking a risk with unknown liabilities by buying the entire company (not just its assets).
At this stage, you will need to provide the buyer with a “Schedule of Assets” to be transferred in the agreement. This should be a list of all accounts, domains, emails, code, and other items required to manage the apps. This list will form the basis of the asset transfers that occur during closing (for more details, see Step 5: Closing). To make the transfer process easier, we recommend changing your administrative accounts to have the same username and password.
You should also ask for conditions on your ongoing relationship with the assets. Do you want the emails addressed to you forwarded for several months? Do you want your name and likeness to remain linked to your app? Or removed? Do you want to be able to disclose the acquisition publicly? Although these terms can be added to the LOI at the outset, most buyers should be accommodating with these requests.
If all has gone smoothly, it should take less than 30 days from signing the LOI to signing purchase documents, transferring assets, and wiring funds. While every buyer will have a slightly different closing process (as detailed in their purchase documents), a typical closing procedure for an APA is as follows:
The escrow agent can be a third-party service provider (like Escrow.com), but in our experience, it is common to have one of the party’s lawyers function as the escrow agent. Escrow agents add significant additional costs (often 1-2% of the deal price), so if you're already familiar with the buyer, the added cost is probably unnecessary.
The hardest part of selling your app is evaluating the offer. Is this a "good" offer?
In some sense, this is subjective. If a buyer wants to sell for 10x revenue, then most offers won’t qualify as good. The quality of an offer is also relative to the quality of the app, but sellers tend to be more optimistic than buyers about their app’s quality. Sentimental value can be material for sellers, but it’s financially irrelevant for buyers.
In another sense, this question is objective. Is this offer better than what you could get elsewhere? In other words, is this equal to, or above, the “market price”? Is this offer better than keeping your app and collecting the earnings? The limited market data on app valuations and transactions can make this hard to answer, but we’ve compiled a detailed assessment covering everything you need to know about the four central components of an offer: buyers, earnings, multiples, and structure.
Part 2 is coming soon! For a preview, please reach out to us at [email protected]
We provide a valuation estimate within one week. You don't have to be interested in selling. We'll also share tips to increase your app's value, make intros to other in the industry, and invite you to exclusive events.
You may be surprised by how much your app is worth.