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Understanding the Value of Your Mobile App: Key Factors and Strategies

Today, thanks in no small measure to platforms like Buildfire, there are more successful mobile, SaaS and marketplace apps in the market than ever before.

While there are numerous different kinds of monetizable applications that can be sold—for instance, marketplace apps like those for Shopify and Magento which are often third-party “add-ons” and SaaS apps which are typically hosted in the cloud and accessed through a browser or proprietary client—mobile apps tend to be more universal in nature and refers to any application deployed locally on a laptop, desktop or mobile device.

Here, we will refer to these universal apps as we focus on how to value an app.

If you’re the owner of a profitable app with a proven track record of success, chances are you’ve wondered how much your app is worth. It’s a difficult question to answer, as each app business requires a detailed understanding of its unique complexities.

Certain valuation drivers are industry or macro-related, so exit planning should be a consideration from day one to ensure that when you are ready to sell, your app is in the best possible position.

Some crucial factors, such as the age of the business and niche cannot be improved after the fact. In this article, we will focus primarily on the drivers that influence an app’s value while also improving the operations and profitability of the business in the meantime.

Many variables go in to accurately valuing app businesses and you can explore them in a greater detail here. Typically, some of the most important tend to be:

While you may not yet be considering selling your business, understanding what makes an app attractive to potential buyers can help you build value—not only at the time of sale but during the time you’re operating the business.

No matter which stage of your business journey you are in, taking action wherever possible to positively impact the valuation drivers we outline in this article can substantially increase the value of your app.

Establishing Baseline Earnings

The first step to determining the value of a mobile app is to evaluate earnings. Earnings will be the baseline to which other valuation drivers will be applied.

Method	Application	Details
SDE	Apps valued under $5 million	Includes owner’s salary and personal expenses as “add-backs” to determine true profit potential.
EBITDA	Apps valued over $5 million	Excludes interest and taxes to provide an accurate snapshot of operational efficiency.

Depending on the amount of gross revenue and overall structure of a business, we apply two different methods to establish baseline earnings: SDE and EBITDA.

Let’s take a quick look at both:

Seller’s Discretionary Earnings, or SDE, is typically applied to apps with an estimated valuation of under $5 million with an owner-operator model. With the owner leading the business, it is common practice to charge personal expenses to the business entity for tax purposes. Additionally, an owner will often pay themselves a salary.

The combined amount of salary and personal expenses may comprise a significant amount of gross revenue. When using SDE, this gets “added back” to the final earnings determination. This helps determine the true underlying profit potential of the business, which might be obscured without the “add-backs.”

Earnings determinations of apps whose estimated value exceeds $5 million and are typically not owner-operated are calculated using the more complex Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) formula. EBITDA is an industry-standard method of analyzing the operational performance of larger companies.

By discounting expenses like interest and taxes, EBITDA provides an accurate snapshot of the operational efficiency and earnings of an app business.

Larger, more strategic acquisitions often use revenue multiples for high-growth businesses in order to account for one-time investments and provide an accurate picture of the earning potential of the business.

Once a clear picture of earnings is established using either SDE or EBITDA or a combination of both, the following valuation drivers help determine the true value of an app business.

Mobile App Valuation Drivers

Abandonment

Related to the number of downloads, and of similar importance, abandonment refers to customers failing to use your app after downloading it. Abandonment is a significant challenge for app developers and marketers. It is estimated that, on average, one in four mobile apps are abandoned after a single use and lose 77% of Daily Active Users (DAU) within three days of installation.

If your abandonment rate is high, conduct a thorough examination of your onboarding process. Look at drop-off points and use them to determine ways you can optimize the process to entice downloaders to use your app.

Elasticode can help you optimize your user onboarding experience. Clevertap gives you powerful insight into how users are utilizing your app and aids in developing drip email campaigns to keep your app’s users engaged.

Financials

It should go without saying that having complete and verifiable financial records is a requirement when valuing any app. Despite this fact, many owners neglect to follow accounting best practices, especially in the early stages.

Accounting packages like Intuit’s Quickbooks eliminate virtually all the friction involved in keeping your books up-to-date. Quickbooks syncs with your bank accounts in real time and offers instant access to valuable reporting such as cash flow forecasts and profit-and-loss statements.

Using Quickbooks, or similar software, and following accounting best practices from the start is one of the best investments you can make in the long-term value of your business.

Growth

One of the critical factors any potential buyer will look at is growth. It is virtually a given that an app with growth figures that are trending upwards will be a more attractive target for acquisition than one with stagnant or declining growth.

Growth is another area where documentation is imperative. From as early a stage as feasible, your business should utilize industry standard tools like Google Analytics for Mobile Apps to measure your app’s growth, as well as go beyond basic Google Analytics functionality.

The more detail you have when measuring your app’s performance, the better. Look into building Google Analytics reports to gain deeper insights.

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There are various tools to help you get even more granular with your analytics. App Annie for iOS and AppsFlyer for Android are two of the most popular and powerful.

Owner Involvement

As an owner, are you spending more than 20 hours a week operating your app business? Limiting owner involvement in favor of outsourced assistance (or employees) is one of the best ways to increase the value of your business as most buyers are looking for passive income.

With few exceptions, buyers are typically not seeking to acquire a business that requires their full-time involvement, preferring that there be some help in place, even if this reduces the baseline earnings (note: this can lead to higher multiples to more than offset the decrease in earnings).

Quality of Code and Documentation

Code is the backbone of any app. Any potential buyer wi

Concentration of Earnings and Platform Risk

Concentration of earnings can be explained as having “too many of your eggs in one basket.” While this a concern for most businesses, it is of particular concern to owners of apps.

Many apps are dependent on a single product, monetization method or niche, making them particularly vulnerable to unforeseen change.

Apps are also unusually susceptible to platform risk. The vast majority of mobile apps are reliant on two platforms: the Apple App Store and the Google Play Store. This dependence makes app owners highly vulnerable to change in either platform’s policies and technology.

Platform	Risk
Apple App Store	Vulnerable to policy and technology changes
Google Play Store	Vulnerable to policy and technology changes

At a minimum, this reliance on third-party platforms means apps will require frequent updates to remain viable. Of less likelihood is the concern that changes to either one or both of the platforms will render an app redundant or unsellable.

This is a risk to which developers of cloud-based apps, for example, are less susceptible.

Whether you do this primarily through organic or paid search, it is important to document where your traffic comes from. At a bare minimum, utilize Google Analytics to track and document your traffic, right from the start.

Your traffic data is vital not only for an accurate valuation but will prove invaluable for monitoring and improving performance.

Final Thoughts

Some app startups strive to be the next Angry Birds. Other mobile startups use app development for rapid growth to make hundreds of millions of dollars.

Thanks to plug-and-play platforms like Buildfire, creating a successful mobile app is easier than ever. Having an understanding of the factors that go into valuing an app can help you build your app business with value in mind right from the start.

Aspect	App Development	Website Development
Experience Required	Similar to selling websites	Experience can be leveraged
Value Calculation	Impacted by various factors	Comparable process

Many of the processes outlined above, from keeping accurate records of financials, traffic, and growth, to developing your app using coding and documentation best practices, are much easier to implement in the early stages of your app business.

Not only will these measures help prepare you for a successful exit from your app business in the future, but they also provide a solid framework for making crucial decisions throughout your business journey.

Looking for further information? FE International, a leading M&A advisory for online businesses, offers an in-depth of exploration of how to value a mobile app.

About the Author: Since founding FE International, the leading M&A advisory for online businesses, in 2010, Thomas Smale has consulted hundreds of digital entrepreneurs on exit strategy, growth, and business development. He is a highly sought after speaker at digital conferences worldwide. Thomas knows what it takes to bootstrap a business, growing FE International from nothing into a global concern with offices in New York, London, Boston, and Singapore while consistently doubling annual revenue and average deal size.  He writes a weekly column for Entrepreneur, and is a regular contributor to the FE International blog as well as many other prestigious online outlets.

Frequently Asked Questions

• What is the importance of owner involvement in app businesses? Limiting owner involvement can increase the value of your business as buyers often look for passive income opportunities.
• How does platform risk affect app businesses? Apps are highly dependent on platforms like the Apple App Store and Google Play Store, making them vulnerable to changes in policies and technology.
• Why is traffic data crucial for app valuation? Traffic data is essential for accurate valuation and helps in monitoring and improving app performance.
• What role does code quality play in app valuation? High-quality code and documentation are crucial as they form the backbone of any app, impacting its value significantly.
• How can app startups achieve rapid growth? Utilizing platforms like Buildfire and understanding app valuation factors can help startups grow rapidly and successfully.