Forums: Discussions for entrepreneurs and small business.

Hello,

I`m a programmer and entrepreneur. My web-based business has been growing well and is really starting to take off. It`s a subscription-based service where users pay a monthly fee to use the site.

Recently, another similar service (a competitor that offers only a portions of the features we do) decided they want to merge with us. I like the idea of bringing on their customer base (which is quite small), and giving them a percentage of the payments from the customers they bring on. I would like to simply build their existing functionality into our site, and give them commissions on any users that use that part of the service).

But it seems like they want equity ownership in the entire company (which is an LLC). If all they`re really bringing to the table is their customer base and business expertise (which they do seem to have more of than me), should I consider giving them ownership in the company, or should I stick with a commission-based system?

He`s going to be sending me a more detailed proposal tonight, but I`ve got a conference call with him tomorrow and am not quite sure what route I should go. Sorry if this message was vague. I can post more details if you need it.

brandag,

If you don`t want to deal with giving this person equity another option you could consider is buying the company out.  If he is contacting you about a merger then he is motivated and would possibly consider being bought out.  Obviously it`s a bit more complicated than that and there are lot of financial figures that you need to look at but it`s an option.

To give you more detailed advice I think we all would need more info about what kind of offer he proposed and the general subscription numbers of his and your websites.

Good luck

letutor, I agree with your assessment. 

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Vincent Wilcox (a.k.a. KRAKR)
Drummer
My band: Letters Make Words

That`s an interesting idea.  They have about 30 active subscribers, and I`m not sure what their company is worth. I guess my only concerns about buying them out would be:

1) I may not be able to afford it
2) They`re not really extreme competition since we offer a much better service and theirs is outdated (they`re not even doing any marketing because they don`t like their product anymore)
3) I could easily integrate their existing application into my own for free (since I`m a programmer) without having to purchase it.

So what you`re suggesting that purchasing would do for me is get me their client base without having to give them equity in my company.  And if their client base is only 30 subscribers (they make about $1000/month from them), what is a ballpark figure for how much that would cost?
But then there`s the question of how many of their clients would actually migrate to our system. I think most would, but you can`t guarantee it.

Is there any reason that I would want to give them equity? Or do you still recommend buying them out?
Thanks for your help! This is a great forum!

If they are not a serious competitor of yours you could consider doing nothing at all and eventually they will abandon their product or their customers will naturally migrate to your product anyway.  You could launch a direct marketing effort to convert their customers which could be less costly than buying them out right.  Because if you buy their website and convert it to yours their is bound to be some customer backlash and some would leave your service after you purchase their account. 

I would say a buyout or ignoring their offer and focusing on converting their customers through direct marketing efforts would be the best approach. 

If you offer a buyout consider all the risks and use those as leverage to the purchase.  You can make a low ball offer and the worst they can do is reject it and possibly renegotiate.

 

Thank you for your great comments.
What is entailed in doing a buyout?  It appears simple on the outside (you give them money and they give you everything in their company), but it sounds like there are more complicated things to consider. What are some other risks that I should be aware of, and how do I estimate what to offer them as a price? (Is there a formula I can follow, etc.?) Thank you for mentioning customer backlash. I hadn`t thought of that.

Also, how would I focus my marketing on converting their customers if I don`t know who their customers are exactly? I mean, we`re targeting the same group of people, but I don`t have access to their database yet of course. So do you mean just continuing my current marketing efforts, or targeting the keywords on their site, etc?

The idea of just letting their business die (ignore their proposal) might be a good one, although he seems pretty persistent to keep it alive (by trying to merge with me, and has contacted other companies as well, he`s told me). He just doesn`t have the money to keep it alive himself so is looking for some help. It`s nice to eliminate potential competition while there is none, but whether there will be any, I don`t know.

So, if he does have some good business knowledge (that`s questionable), and could help with the marketing and bring with him his existing customers, would there be any reason to continue with a merge either by giving him equity in the company or as an affiliate (earning commissions on his referrals), or should I just look at buying him out or ignoring the proposal?

What`s wrong with a good ol` joint venture? It will allow you to create a bridge between your two companies, without compromosing either one. Just get a JV contract drawn up that gives them X percent of the total based on their contribution... (Ex.) If they have 30 clients, and say they get $10 a month from each... that`s $300 a month. You, on the other hand, have 70 clients, which is $700 a month. In the JV agreement, I would give you 70% of total funds, and him 30%, for a period of 8 months. Following the 8 month trial period, see how many of his clients left, how many of your original clients stayed, and the total number of new clients. Factor this in to give you a total contribution. (Also, any domains, physical property, "sweat labor" has to be figured in as well.)

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Yes, sweat labor is a big part because we`re doing all of it. We`ve written a much larger program, and would just be integrating what little piece theirs has, into our software. Essentially, in the merge, they would be getting money for nothing while we do all the work - unless they do other work like marketing and building system requirements, customer service, etc.
Hmm...