Investing in a new venture has massive upside but is also fraught with potential risk — and when you buy a mobile app business it’s no different.
How To Do App Due Diligence For A Potential Investment
Each app business is unique and has its own challenges when it comes to app due diligence. The sheer volume of stats, metrics and information can be overwhelming. But with an app due diligence framework you can become an expert at assessing a mobile app business before you buy.
Buying an app business differs from purchasing a traditional website or web app. Apps are listed on an “App Store” (Google Play, Apple App Store and Amazon Appstore). These app stores have their own guidelines and periodically review apps to ensure compliance. When buying a mobile app business keep in mind the App Store has final say on what can, and can’t, be included in the app.
With that in mind let’s delve into the key areas you need to assess as you embark on your new app entrepreneur pathway:
The Competition
The first step of any app due diligence process is to check the positioning on the app stores. Apps with higher ranked keywords can expect to see a continuous flow of new users without any ad spend. For this reason the search results are a competitive place for some app categories.
Start by searching for the app name then any descriptive terms users may use to find the app. Make note of other apps that appear in results — these are the competitors and will offer valuable insights.
Things to look for include:
- What features do competing apps include?
- What business model is used in the app category (subscriptions, in-app purchases)?
- How does the app differ in price from the competition?
Tools like appfigures.com can be used to check App Store positioning for any given keyword and provide examples of related keywords. The free account shows a limited number of results while the paid version offers added insights, download count (estimated), paid ad costs (estimated), category ranking, user ratings and more. Alternatively you can use the App Store search feature on your phone. Note: Results will vary depending on country and device (a search on an iPhone in Australia will show different results than results in the United Kingdom on an iPad).
Customer Acquisition, Retention & Feedback
The best app in the world is worthless if nobody is using it —
The App Store is a saturated place. With thousands of new app updates being added every week. For this reason you’ll find users are spoiled for choice and rarely develop a sense of brand loyalty. Even the slightest inconvenience may result in the app being deleted. Getting users onto the app, and keeping them there, is a slow iterative process. Buying a mobile app business with established user acquisition channels is a great way to fast-track this journey —
There are main 4 types of user acquisition channels:
- Organic search (free)
- Sponsored App Store listings (paid)
- Social media (organic / paid)
- Referrals (shared by users or linked from websites)
Next we ask — What do users think of the app?
Luckily for us the built-in App Store review feature has plenty of insight for the app due diligence process. Scour the user reviews for common feedback themes. Particularly focus on reviews with 3-4 stars. These are the users who have evaluated the app (perhaps over several days) and have taken the time to provide constructive feedback. You can quickly discover what’s working, what’s not and what’s missing through these user reviews.
Don’t discount an app just because it has bad reviews –
Bad reviews don’t always correlate to poor growth of an app. When looking through reviews be mindful that they’re generally skewed towards the negative (users are more likely to complain online than they are to praise an app).
Growing The App
Growing an app is the quickest way to recoup the cost of buying a mobile app business. The main areas for growth are: boosting user acquisition, improving business models and increasing retention. Getting these elements working harmoniously has a multiplying effect on mobile app business revenue.
Growth ideas include:
- Optimising for App Store Exposure
By increasing search engine positioning the app will be seen by more potential customers and as a result downloaded more. - Adding Paywalls / Subscription Models
A paywall limits the user from accessing the app until they subscribe to a free trial. Adding a paywall can increase revenue by 10 times. - Implementing Timed Notifications
Android & iOS apps can have pre-programmed timed notifications. These are triggered at a specific time throughout the day. Adding a timed notification has the ability to increase user engagement. - Making Shareable Moments
Apps with shareable moments spread across the internet like wildfire. Users who are encouraged to share achievements, trophies and unique stats will happily do so.
Operational Insights
It’s easy to think of an app as a standalone product that will generate a passive income. But this is sometimes not the case. Apps will require upkeep from time to time in the form of updates and new features. Some app categories will require more upkeep than others.
The most important part of the app itself is the code —
Understand that the programming language, framework and technology stack can all impact the cost to maintain the app’s code. It’s easier to find developers, freelancers and employees when you’re dealing with a programming language that is widely adopted. Apps written in obscure languages run the risk of requiring a re-write in the future. Languages commonly used include: Swift, Objective-C and Flutter.
Likewise the backend infrastructure suffers from a similar issue. Be sure to check that the app is using standardised backend systems like Amazon’s Web Services (AWS). Custom developed backend code may become a headache to scale and maintain in the future.
You should always ask the seller how much of their own time is being spent on maintaining and supporting the app. The seller will most likely be working on their app for free. Which means their time won’t be showing as an expense. Keep in mind you may need to hire a programmer if the seller is spending upwards of 50 hours a week maintaining the app.
Financial Due Diligence
The simplest way to gain insight into the financial details of an app is to ask the seller to add you as a user on their app developer accounts. Apple has App Store Connect while Google uses Google Play Console. You will need an account on each of these services to gain the required permissions.
Once you have access to the developer dashboards start looking for:
- Excessive refunds
- High churn rates (users who don’t renew)
- Download trends and revenue trends
If there’s a server involved (or additional infrastructure in the backend) it’s important to understand the operating costs of these items and what impact an increase in traffic would have on the bandwidth costs.
Then, ask yourself — Has the seller been upfront with advertising costs?
It’s possible that download numbers can be inflated by paid ads and masked as organic downloads. The Google Play and App Store Connect dashboards don’t immediately make it obvious whether this is the case. But there’s a few things you can look out for:
- A large number of downloads from “Search Results” but poor keyword positioning could mean ads are running in the App Store
- A large number of third-party referrals could mean ads are running on social media or external sites
App Valuation Calculations
The app valuation is based on a range of factors which are unique to any particular app. To simplify the valuation we’ll be basing the value on annual revenue and multiply by a factor between 3 and 5 — known as the multiplier. This multiplier is a standard method to form a baseline valuation without factoring in risk, code complexity and associated advertising costs.
Calculating Valuation for Subscription Apps
Apps with a built-in subscription model are valued based on their Monthly Recurring Revenue (abbreviated to MRR). MRR is calculated by multiplying the total number of monthly subscribers by the average revenue per user (abbreviated to ARPU).
For example an app with 500 subscribers paying $10 a month would have an MRR of $5,000 (500 x $10)
This would value the app at between $180,000 (with a multiplier of 3) and $300,000 (with a multiplier of 5)
(500 subscribers x $10/month x 12 months x multiplier)
Calculating Valuation for Other Apps
Meanwhile apps that generate revenue through upfront sales, once-off in-app purchases or advertising revenue are calculated based on more traditional business valuation models and usually attract a lower multiplier.
For example an app with $1,500 of sales per month and ad revenue of $3,500 per month would be valued between $180,000 – $300,000
(($1,500/month sales + $3,500/month ad revenue) x 12 months x multiplier)
Conclusion
Apps can be incredibly lucrative (check out this app portfolio that sold for $35M on Flippa), and as the app industry continues to grow, there will only be more opportunities out there for buyers (and sellers) of all sizes.
