QA &
Q A
We hear this term valuation used, can you explain the model and how it applied to hosting providers or organizations with recurring revenue?
The valuation model for recurring revenue technology companies has been around for a long time. I have been tinkering with this model since I worked in the wireless pager industry … AKA: The Beeper business.
The basics of the valuation model are the same but the importance of each variable changes as each recurring revenue technology industry is created, evolves through growth and maturity, then declines. (Industries such as paging, long distance, CLEC, communication and broadcast towers, ISP, web hosters, SaaS, IaaS and the others to follow).
On the revenue side there is the one-time revenue typically present in both the initial customer acquisition phase and follow up customer expansions (hard assets, software, IT consulting). With the recurring revenue piece of the model variables such as growth, margins, quality of customers and customer churn are the main drivers.
On the expense side of the equation to support the recurring revenue base, there has to be a capital investment, either a company owned model or a reseller model. There are always pros and cons of each approach.
Whenever a new client mentions valuation to me, one of the first thoughts I come up with is … valuation depends upon the buyer’s strategy. Different companies are worth different amounts to different buyers, for very justifiable reasons. For example, if one buyer wants to either build a IDC or acquire a company which owns one, and another buyer already owns a IDC which is half utilized and just wants to acquire this seller’s customer base ... well, these 2 buyers will look at the value of this seller completely different. There are many other examples of this.
When a mid-sized hosting company is ready to go through the acquisition process, what types of information do you require to get the process started?
I require this to be filled out, with the exception of any tax records to start:
http://www.furlowconsulting.com/furlow-web-hosting-internet- due-diligence.htm
What types of analytics do you look for when making a valuation of a hosting company?
1. Linux vs. Windows 2. Control Panel 3. Own IDC or not?
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4. Is the company focused on one service offering, or all things to all people (shared, dedicated, managed, VPS, co-lo, cloud, I.T. services etc.)
5. Own Equipment or Lease 6. Billing System 7. Own IP’s 8. Customer Churn 9. Company Reputation 10. Customer Contracts 11. Company has customer's CC info 12. Customer Support operation 13. Management and Employee experience
What helps improve the overall valuation of a hosting company?
Aspects of a company which make it more valuable are a focused strategy, consistent improvement in operations and cash flow, ownership stability, organization and company reputation.
Once an owner decides to sell his company, “it is what it is”, the only thing he can do to improve the overall attractiveness and liquidity of the company is to organize it as best as he can. An owner really cannot increase the valuation at the last minute, just increase the quality of the presentation through organization, which does increase liquidity and the attractiveness of the company.
Having said all of that, if an owner wants to plan for a sale of the company 1-3 years out, there certainly are things the owner can do to increase the value of the company when it comes time for the divestiture.
1. Track, record, and organize every operational metric. Not only does this help with month to month internal management, but it also is very impressive when it comes time to sell the company.
2. With regards to control panels, billing systems and other software products, well-known brand names are almost always in more demand than custom software. I understand when companies are in their early growth stage and saving money is crucial, so developing software in-house might make sense at the time. However, when selling a company, custom software products are road blocks. Some buyers are very software savvy and easily overcome these, many buyers are not (or they are software savvy, yet they do not want to allocate additional post closing migration time required to deal with the custom software.)
What hinders the overall valuation of a hosting company? 1. Lack of organization
2. Custom software, if not easily compatible with popular software
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