what do small webhosting companies go for these days? I see alot of people trying to sell there companies with like 100 members but they never post a price.

see alot of people trying to sell there companies with like 100 members

Where? I'd like to find them!

go to the adverising section of webhosting chat theres a few.

It really depends on a host of factors, including the following:

1. Size, both in terms of accounts but most importantly, revenues. In my opinion, ARPUs (average revenue per user) is a very important gauge. Too high, and customers will be churning to lower-priced hosting alternatives. Too low, and your margins get too small :)

2. What are you buying? Just the accounts? If you have your own operating structure in place (servers) with the capacity, then (in theory) this revenue should amount to 80%+ free cash flow. Don't let the seller know that :) If you are not incurring any liabilities other than future service obligations for pre-paid hosting services (deferred revenue), then this is a plus.

3. Competition for deals. Right now, I think a person could probably buy-up a fair number of "exhausted" (not growing) resellers utilizing only 3 platforms (say Plesk, Ensim, and XZY reselling service). I think for the smaller (< 1,000 accounts) hosters, it is a buyers market.

Having said all of this, I would expect to pay between 6x to 9x monthly revenues for the accounts I am acquiring.

Earthlink reguruarly pays around 6x to 9x for dial-up subscribers, but the caveat there is 1) the customer must migrate to Earthlink and 2) they only pay it after 1 billing cycle. This was accurate as of 6 months ago, and I would think it would be a decent gage to $10 to $15 ARPU shared hosting.

Just my thoughts.

I would pnly pay 3-4 times the 30 day recurring revenue. I wouldn't even take the yearly revenue into the equation.

Paying 9 x is insane and is not the going rate in this industry anymore. If you were buying a hosting company with 100 members all paying $8/mo - I'd give $2500 for it, maximum. I'm only talking about the clients and not the brand. Take into account the server you have to buy to put them on, it will still take 6 months to see a profit and that doesn't even include the churn rate. Paying 9 x is financial suicide. Would take more than a year to see a profit and as well as the normal churn, you have to deal with non-renewals from bored webmasters.

Also, never pay a dime for an account that is alredy prepaid 6-12 months. That is not an asset to you. It is a liability to you during that period that you don't make a cent on.

NexDog is right on!

And that about sums that up exactly!

tes it does :) you know what i never thought about that people might be on a yearly plan.

Lets do the math on this, as I believe an efficiently run hoster would make very good money off of buying revenue at 9x ARPU.

One way to look at it is what do you spent in advertising to the total new accounts you get. If you are spending around $90 to get a $10 shared account, then you are basically paying 9x monthly.

Larger hosting providers ($3 million+) are still driving valuations of no less than 12x monthly revenue, or better put, 5-6x EBITDA. at 30% EBITDA margins, this translates to:

$3.3 million revenue at 30% EBITDA margins is $1 million of EBITDA at 4x EBITDA (bottom of the range) is $4 million.

$4 million valuation / $3.3 million revenue = 1.2x annual, or 14.5x monthly ARPU.

If you cannot make 20% cash flow off of hosting, then 9x would not make sense. Heck, you do not even need to make 20% margins, at 10% margins the math looks like the following on $1 million of revenue:

$1 million annual revenue x 0.75 (9x monthly) = $750K purchase price
$1 million x 10% cash flow = $100K cash flow per year

Cash on cash return = $100K (return) / $750K (investment) = 13.3% rate of return

I do not see many places where you can get a 13% ROI these days, and 10% EBITDA margins is highly conservative for an efficient and highly automated hosting firm. Most well run hosting firms have no problem achieving 30% to 40% EBITDA margins. At 40% EBITDA margins, the cash on cash return goes to 53%.

Obviouosly, valuations are largely a function of the cash flow that can be derived off of the acquired revenue, which is a function of how well the hosting firm is run.

Originally posted by mgphoto
Also, never pay a dime for an account that is alredy prepaid 6-12 months. That is not an asset to you. It is a liability to you during that period that you don't make a cent on.

Hm, I can't follow your logic. If you have some money and want to invest in a property, for example, the ROI may be years before you start to get profit out of your propert. Why should it be different in hosting industry? I will not call that a liability. It's an investment.

mgphoto is right in that you would want to do an adjustment to the purchase price for deferred revenue, so that you are netting out all of the pre-paid hosting service that you are now ultimately acquiring.

We run into the same issue when we acquire websites which accepts pre-paid advertising services :)

Gabriel, I have to admit that you lost me with most of your post. When it comes to money, I'm just damn good at spending it and that's about it. ;)

I am actually considering buing a couple of small hosting companies that have around 100 accounts and the revenue is about $600/mo with a bit for yearly. I would have to get a server to put these accounts on as it's just the clients we could buy. I can't see $5400 for such a company as being a bargain. Please help me understand. :)

Well, it may not be a bargin :)

You have to fully examine what your cash flow margins are on the acquired revenue- this is key. If you can pay 3-4x montly revenue versus 6-9x, obviously less is better.

Your cash flow margins dictate the amount of cash you earn off of the revenue you are buying. Cash flow margins are adversly impacted in the hosting business by:

1. Cost of personell (sales, support, billing, etc.)
2. Cost of hardware/software
3. Cost of advertising (but if you are buying the accounts, you do not have to advertise to the accounts!)
4. Cost of bandwidth, local loops & other telco.

Now, assume you have capacity in all 4 above for 1,000 more accounts. Further assume that you know based on history that you have to spend $100 in advertising to get a $10 shared account. If you could, you would rather acquire 100 accounts with a $10 ARPU ($1,000 of monthly revenue). You would get 100% cash flow margin (pre-tax) off of the revenue (since you have personal, server, bandwidth capacity) and so you pay 6x $1,000, or $6,000 and you are making $1,000 per month.

Annual ROI = $12,000 ($1,000 per moth x 12 months per year) / $6,000 (cost to buy the $1,000 revenue @ 6x) = 200% return!

This assumes 100% cash flow from revenue because you have all the capaicity for the new 100 accounts without needing to invest in any of the 4 items above.

In the real world, you probably have some variable costs with each account, especially if you are a reseller or use Plesk/Ensim or some other application where they charge you per account you host. This chances the scenario completely.

I hope this helps you understand :) Clear as mudd?

Definitely not clear at all. ;)

All I know is that I could buy a company that has a monthly recurring revenue of $600 but I'd have to buy a server (minimum $150/mo) so my profit is $450 month. If I pay $2500 for it, it's well into month 6 before we reap the reward but by the end of the year, I guess we are $2500 out on top. I just don't see things long term, I just feel the pain of the first six months, lol.

Originally posted by NexDog
Definitely not clear at all. ;)

All I know is that I could buy a company that has a monthly recurring revenue of $600 but I'd have to buy a server (minimum $150/mo) so my profit is $450 month. If I pay $2500 for it, it's well into month 6 before we reap the reward but by the end of the year, I guess we are $2500 out on top. I just don't see things long term, I just feel the pain of the first six months, lol.

Well ol' Gabriel Murphy should know as he has been on a buying spree. Interesting where he is going with it. ;)

The bottom line is you can bully 100-client size host into a small asking price. The question is would you sell yours (nexdog) at the same rate? Hell no. I wouldn't consider it for less the 1x revenues. Once our proprietary management software is done, I wouldn't sell for less the 1.1 - 1.25x.

We use to take in small host. It got to be a nightmare. Unless you have a system that will do this easily, you will lose out. We have a proprietary system in works that will intigrate other host into our collective with ease. Hopefully it will be done before the great 'fall out' about to happen in 12 - 18 months. There will be some serious bargains on host soon. ;)

I hear ya there, UBC. The amount of bedroom hosters that popped up in the last year or so will be selling out and then the middle sized companies can lick their lips at the abundance of cream. ;)

As for how would I sell our clients, tough question but the larger the host, the more you should pay. I turned down 100k not so long ago.

Hey Laurance, 3 times monthly revenue for your business - no worries at all!! :D

Originally posted by NexDog
I would pnly pay 3-4 times the 30 day recurring revenue. I wouldn't even take the yearly revenue into the equation.

Paying 9 x is insane and is not the going rate in this industry anymore. If you were buying a hosting company with 100 members all paying $8/mo - I'd give $2500 for it, maximum. I'm only talking about the clients and not the brand. Take into account the server you have to buy to put them on, it will still take 6 months to see a profit and that doesn't even include the churn rate. Paying 9 x is financial suicide. Would take more than a year to see a profit and as well as the normal churn, you have to deal with non-renewals from bored webmasters.

I would agree. I chuckle when I hear prices of 6x-9x thinking it's the market rate. Once you consider their current net revenues, the resources needed to support the clients, large amount of prepaid accounts (which you have to support at no revenue and possible defection at the end of the year), the economics of the sale changes dramatically. But as with everything, some are willing to pay more, and that will always land them the purchase. Well, I guess I just use my cash more effectively elsewhere.

I would rather shell out 50k for a company that does 10k a month than 5k for a company that does 1k. By the end of the year you are seeing alot more return. So the bigger you get, the more you are worth. An obvious statement that runs deeper than would think.

Yeah they are, I just go email about ISPcheck now too :O

When you coming to see me Gabriel ;)

Seriously though - I was under impression 2x-3x was the rate JUST for the clients. What would be the rate if buying everything. the URLs, site, server clients on etc etc?
Curious because we where thinking of purchasing a few around the begging of year.

The server the client is on is an expense and not an asset and doesn't contribute to the value of the company unless they have their own servers that's colocated. then of course, depending on the machines you pay them a value for it. The other properties of course depends on how valuable the brand name is. Obviously if it is a small company with 100 clients or so, their brand name (inclusive of URL, etc) is not going to be worth much if anything. (probably nothing). Since you are going to be intergrating it to your main site, the site is likely to be worth nothing to you too.

Other factors that can be considered of course is software licenses and such. Those obviously can be tagged a value,

But all in all, it's not going to be a large number you are looking at as software depreciates faster than hardware nowadays.

Good points, Thanks :D

Let me ask this, have you seen people who buy a host co. and keep everything in tact, simply add the site to their parent company. (e.g. add something like "a parent-host company" to footer?
Wouldn't there be less turnover if the clients don't need to go through the changes of moving sits etc etc.

Hostway do that.

Other factors that figure into the cash flow projections and the valuation include:

The plans the existing customers are on. Are these plans that you would offer on your own or are these cut rate, limited profit plans?

The quality of the customers, based on length of time with you, types of sites, etc.

These two areas are what really distinguishes so many of the small hosting companies from the larger ones. This is why the typical value of the company sold on WHT would be signicantly less than Gabriel's estimates and why some of the larger hosting companies would merit a larger multiplier of revenues.

This is also why I stopped buying small companies about a year ago.

Real-life examples: I would place the value of annual accounts on average at zero or less. The prepaid amount generally is more than the value of the accounts. Company ABC has 200 prepaid annual accounts for $35/year with 20GB transfer per month. That account if not prepaid would be worthless, 20GB for under $3/month. However, you find out that they have acquired 80% of these customers in the last 4 months. So, the prepaid amount turns out to be over $5,400. They would have to pay me to get me to take those accounts.

Real-life examples: Previous host has been careless in billing, records are not in good shape, even email addresses for customers missing. Many customers secured through IRC, AIM, etc. Lots of special deals. Often in a situation such as this you will find anywhere from 50-80% of the accounts never even sign up with you or provide billing information, so never become your customer.

Real-life examples: Many of the kiddie hosts have such a poor demographics of customers including IRC, Adult, Warez, SPAM, and Ranting sites. Also, many of the customers are themselves underage. They create more problems than they are worth.

We do yearly plans though and as we've been in business for 2 years, we actually many thousands of dollars per month in renewing annual accounts. In this scenario, annual billing is almost like monthly billing. :)

But in the case of buying a small host that has been in operation for 6 months - different story.

Man all this has me really thinking :0

At what point w yearly clients, is the seller able to add those back into the selling price?

E.G. - 6 mos left on paid service, before renewal?

Really, any and all deferred revenue (whether all 1,000 accounts you are acquiring have prepaid for 1 month ahead of when you are acquiring them, or 6 months) should be an adjustment to the purchase price.

We've did some buying and selling 2 years ago, and again this year. Give me buying any day.

Gary

Good info thread, thanks to all :D

This is an interesting thread!

I believe there are some real flaws with comparing acquisitions to accounts gained through advertising though. Here are just a couple of points that perhaps I missed or need clarification that I feel would be necessary in order to make such an assumption.

1) What is the average stay of a client that was part of an acquisition?
2) What is the average stay of a client that was obtained through advertising?


Cash flow does not improve profitability. Many companies have the false premise that more is better and acquisitions are great because they can improve cash flow so quickly. If the acquisitions are not profitable then cash flow will only prolong the inevitable. Spending 9X face value for such an unpredictable asset carries a much greater risk than even the Stock Market in all reality.

Most Hosts that I know gain the lion's share of their business from word of mouth referrals not from direct advertising. If that is a false assumption then please feel free to clarify otherwise. That would mean that a scenario of spending $90.00 on advertising to gain a single 10.00 monthly client is hardly the best-spent money (especially if the lifespan of the clients are only a year or two). I would think if you are spending that much money for a single client you would be better off improving existing services so that you gain more word of mouth referrals. Let's say for a minute that you obtained 100 clients through advertising for $9000.00. Let's say your total costs with server, support and incidentals are $500.00 a month.

In the first two (2) years;
Gross revenue $24,000.00
Costs $21,000.00
Gross profit $3,000.00

This translates to $1.25 gross profit per client per month. This is all based on the assumption that every single client stayed the entire two years and you didn't spend any more on advertising and that all your costs remained the same (never the case).

A gross profit margin of 1.25% (monthly, per client) spread out over two years is hardly what I would call a profit center.

Hello Watcher_TVI:

No doubt that it you should gain customers via advertising if you are spending the same amount as it would cost to otherwise acquire them from another hoster. Churn rates on acquired accounts are typically higher than churn rates for

You should be able to limit your monthly churn to 2%, which is 26.8% annualized. This means you are loosing a little more than 1 in 4 of your hosting customers per month.

If you are thinking your average lifetime of a customer is only 12 months, then this is really bad :) This implies a monthly churn rate of 5.95%.

Churn is effected by:

1. Value proposition (features/price);
2. Price and,
3. Level (and quality) of Support (in some cases, more important than price)

I firmly believe that sub $10 hosting firms with good value propositions should be able to maintain a 1.5% churn rate an no more than that. This would then imply a 50 month lifetime.

I think your churn rates end expenses are a quite high :) Given $21K in expenses on $24K of revenue, your margins would be:

$3/$24 = 12.5%, which I think is quite low.

I do agree that many successful hosting providers get a good number of sign-ups from referrals and word-of-month, but it all starts with advertising. Advertising is the momentum. Look at iPowerWeb, a great example of a good advertiser.

I think some of the most successful (high growing) firms are very good Internet marketers- RackShack, iPowerWeb, etc.

Just my $0.02 :)

You should be able to limit your monthly churn to 2%, which is 26.8% annualized. This means you are loosing a little more than 1 in 4 of your hosting customers per month. Should read...."more than 1 in 4 of your hosting customers per year."

Correct, thanks for the help Incognito!

Good points Gabriel,

As for this though I think your churn rates end expenses are a quite high Given $21K in expenses on $24K of revenue, your margins would be:

$3/$24 = 12.5%, which I think is quite low. I was basing that on your 9X acquisition costs with 0% churn rate over a two year period. You have made my point for me. Acquisitions obtained at such a high cost (9X value) would be a poor investment. It would be even worse if we factored in cost escalations for server/support, and your 2% churn rate. This would lower your gross profit percentages even further.

Yes, if this is your expense structure, then you are correct, 9x does not make any sense.

However, I think 40% cash flow margins are very attainable on acquired revenue.

The difference is we are both assuming very different margins- you 12.5% and I assume 30% to 40% margins. Further, you are using a 1-2 year lifetime, where I think 4 years is more reasonable (implying a 1.75% churn rate).

The difference is we are both assuming very different margins- you 12.5% and I assume 30% to 40% margins. Further, you are using a 1-2 year lifetime, where I think 4 years is more reasonable (implying a 1.75% churn rate). The margin I am using is the one you stated in this thread Gabriel, when you said Lets do the math on this, as I believe an efficiently run hoster would make very good money off of buying revenue at 9x ARPU.

One way to look at it is what do you spent in advertising to the total new accounts you get. If you are spending around $90 to get a $10 shared account, then you are basically paying 9x monthly. I used the $90.00 per $10.00 account scenario with $500.00 a month costs for the server, 24/7 support, CP license, Client management tools, etc.

As far as I know, you can only increase a profit margin 3 ways (generally speaking);
1) Increase the selling price keeping costs constant
2) Lower costs
3) Subsidizing
So I would be very interested to learn how a 40% cash flow margin increase translates to a profit margin increase?

Good solid numbers and information here. 3-6x monthly revenue seems low for any decent sized reputable company, but for small hosting companies that may not have everything, this would seem reasonable based on the risk associated with these types of purchases.

Getting a spreadsheet or breakdown of churn (date started vs. date left, and reason for leaving if known) will help a buyer understand the value in obtaining any new customer base. We have found that very low churn rates (4-6 year client retention on average) coupled with higher priced accounts makes for offers in the 1-2 times annual revenue, which is nice.

Of course, I would not sell for anything less than 3x annual revenue, and even then would have to seriously consider it. If I did sell, I would have to get a real job! *gulp* :)

- John C.

Wow. A good thread on WHT. You do not get much of these anymore. What a treat. :)

I know Gabby gained this expertise from his sale of Communitech. Still pissed you sold to Interland?

Originally posted by UmBillyCord
Wow. A good thread on WHT. You do not get much of these anymore. What a treat. :)
Yes indeed. I'm just waiting for Deb to chime in, and this thread will be even better. :D

A nice addition to this thread, Mr Bob. ;)

Another reason for churn is boredom. We lose very little clients to other companies. Our prices aren't the cheapest but we have no problem getting clients. We did advertise at the beginning but now ony spend $250 at webhostdir. I think we probably get 3-4 signups from there a month so those clients are expensive. Few things though. You might pay $90 for a client (example) but that client might refer another 2 you in turn refers another 2 so over a few months, you could get 5 clients for that $90 and that is cheap. :)

Back to churn though and my point about boredom. We do check on the clients that don't renew and we find that most domains are expired or just dead. Many people start to design a site as a hobby and then lose boredom, financial situation changes and they can't afford a web designer anymore, need to go back to school etc. That makes up for the majority of our "churn" even though they are churning to nothing.

Maybe I didn't pay enough attention but when client retention was mentioned, I didn't see anything about the intrinsic value of the seller's accounting.

Sometimes, there are clients you do /not/ want to keep, because they were sold a plan the company doesn't offer anymore (random example: unlimited everything!) and now it's a liability, not an asset.
Also, I know I would be willing to pay extra for up-to-date and comprehensive accounting documentation.

Originally posted by Gabriel Murphy
Look at iPowerWeb, a great example of a good advertiser.



Or a persistent pain in the rear. :p


Anyways, 2-3x is the going rate, however I've seen scenarios where in terms of large turnovers, say the Aletia(sp?) to JaguarPC, what a mess that was, back on topic. I believe a 4-5x ratio was used based on the fact that the company would of been more profitable, however I could be wrong. Verio I know has a very differential in terms of the market rate for what they are buying, it usually depends.

Annual gain is pretty much the base, minus the cost to acquire(Including URL, clients, servers, etc.), meaning what you will gain over the year from month-to-month clients, if it is profitable within atleast 6-7 months, it was a worthy proposition, but even if you regain within 9 it's not as good, but you are still making a comeback, since I am not going to work with figures(too late I know i'll screw up, and chances are, I already have).

As for the year or x amount month contract commit, in some cases I've known companies to count the remaining months on each client, then submit and add in that to the cost, or a penalty, whatever you want to call it. However, not completely, it's usually done below the 50% margin if even close to that, usually around 15% of contract accounts need to be factored into the price, I don't know or even think this applies to web hosting due to the field, but I could be wrong, and it's kind of hard to factor that to be fair, so don't mind me. :x