QA &
Q A
We hear this term valuation used, can you explain the model and how it gets applied to hosting providers or organizations with recurring revenue?
“Valuation” is really just determining what something is worth. Frank’s rule is that there are only three ways to value anything; (1) what someone will pay you for it; (2) the free cash flow the business will produce for you (discounted); and (3) what it would cost you to go out and build it right now.
In hosting, values are largely determined by #1 or #2 and those methods are closely related to each other as what a buyer will pay (#1) is based on the cash flow they expect to get from the business and #2 is based on the cash flow you expect to get from the business. Generally, these amounts are similar.
For a buyer that plans to move the seller’s customers onto the buyer’s infrastructure, they really only care about the seller’s revenues (as they already know their costs.) These buyers are sometimes referred to as Consolidators and make up the bulk of the buyers in the industry.
In hosting today, values are typically quoted on the current revenue or cash flow of the business but buyers are really analyzing the underlying cash flows that such a price will produce for them.
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?
It is possible to get the process started with very little information. However, the better the amount and quality of information, the better price/terms the seller may be able to get.
Our wish list is for quarterly financials going back one or two years; monthly customer adds and cancels for the last 6+ months and a good general description of the business. However, of the 200+ hosting/ISP and related transactions we’ve done, we’ve rarely had all of that information and we often help prospective sellers pull together what is necessary.
If you are thinking of selling in the next few years, give us a call or send us an email and we can talk about what you have and whether that will be enough. We have various questionnaire’s and templates sellers can use to make the data collection easier.
What types of analytics do you look for when making a valuation of a hosting company?
When trying to understand how the marketplace will value a hoster, we tend to look or check a number of different metrics. Typically though, our estimates end up being driven by just a few of these depending on the unique characteristics each company.
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Here is a laundry list of things that could have a meaningful effect on value:
1. Total revenue, monthly revenue per customer, monthly customer growth, monthly churn, average monthly revenue per customer, product mix, length of customer term, EBITDA, margins, profitability, free cash flow, marketing cost per gross add and website analytics.
What helps improve the overall valuation of a shared hosting company?
1. A good brand and positive customer & revenue growth 2. Focused product mix 3. An amiable, responsible, organized, helpful seller 4. Easy transaction (easy to migrate, no requirements to assume leases, debt or employees that the buyer doesn’t want, no legal, tax or lender issues) 5. Multiple prospective buyers
6. Good financials and a well-organized back office 7. Strong margins
What hinders the overall valuation of shared hosting company?
1. Declining revenues
2. High customer attrition (churn) 3. No brand being sold with the business 4. Disorganized, unresponsive seller
5. “Hairy” transaction (Legal, tax or lender issues, unwanted liabilities that the buyer must assume, stock deal)
6. Technology/software/Control Panels that are old, unusual, proprietary and/or difficult to support or migrate 7. Development services that can’t be separated from customers 8. Few prospective buyers
You once told me, cPanel deals get a premium to the rest of the shared market and get a lot more interest. cPanel Linux and either Modernbill or WHCMS are the slam dunks, can you elaborate and give me your opinion as to why this might be the case?
Migration of a purchased business is one of the costliest and riskiest areas for any buyer or seller. cPanel’s tools make it relatively easy for a cPanel buyer to migrate a cPanel business onto the buyer’s existing infrastructure. This ease of migration/ integration reduces the risk of migration to both buyer and seller and reduces costs.
As a result, cPanel buyers can be more aggressive when bidding for cPanel sellers and there are a larger pool of buyers for cPanel assets. (A lot of the cPanel buyers also don’t want to support another control panel so their acquisition interest does not accrue to other CPs.)
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