Out of curiosity how do you value a hositing company for purchase price

Evaluation is based on customer base size, amount of disk/bandwidth used, net profit, ect.

It really depends on a case-by-case basis though. For example, if you are a company in legal problems, we would rather not get involved. :)

Usually its 6-12 months x profit x 20%

am I understanding you mean 20% of the 6 monthly or annual profit essentially ?

Originally posted by Albator
am I understanding you mean 20% of the 6 monthly or annual profit essentially ?

sorry that was a typo that mean't + 20%

6-12 months x profit + 20%

I suppose the decision on 6 or 12 months is arbitrary and is where other factors come in really

You could possibly get more money for your hosting business if you finance the deal. That can work well because the buyer has an opportunity to get in there and really verify that everything is as it should be and that there isn't a mass exodus of clients after the buyout. For the seller it usually means you can get more money overall on a scheduled payment basis as well as being able to monitor your client's satisfaction with the transition....

Originally posted by thomor25
Usually its 6-12 months x profit x 20%
Generally it's 6 to 12 times 30 day revenues.

That's just ballpark stuff. Then you have another 124 things to consider etc . . .

I wouldn't pay more than 6 x monthly revenue unless the company had a long term good repuatation. These 'companies' that have been around for about a year and now are selling...forget it. Not worth much at all.

3-6 months t/over or 2 yrs profit + assets or ...

entirely dependand on customer count, payment emthods, assets, size, - too many variable to have a simple formula - every business is worth a different amount

I'm seeing stupid prices being paid for customers in the offers forums. I have absolutely no idea how someone is figuring clients from a less than one year old company, bringing in $200 a month (NOT profit) is worth $1000....and more.

I guess everyone has their own way of evaluating a hosting business. Personally, I find it interesting that many people simply want to know if it is worth X times monthly revenue/profit. That is a so simple question that it is almost meaningless without additional details.

For a stable business with a good track record of 2 years or more, we would be prepared to look at 2 years of cash flow (net profit + owner salary) and net worth of company assets (tangible + intangible). And this would entail a payment plan plus a guaranteed performance clause. Of course, we can haggle on price and terms, but that is the general ballpark. For new company, pricing is more variable and generally centers on how much risk involved and what is the return on investment. Overall, we would be wary of deals that are:

- Fast growing company that is for sale. Without a good reason or a guaranteed revenue, we wouldn't touch it, specially if most of the growth is in the last couple of months. You can figure out the reasons.
- Young (no track record) company with large number of clients and modest profit. Even if the expenses are justified, there is a potential risk in terms of client support and expected rate of renewal. Valueing this type of company based on revenue alone is difficult indeed.

Then again, if we see a good deal with less risk or high expected return in our opinion, even a young company is desirable. When the seller requests a valuation formula as a starting point, our typical answer would be:

- Over a year: 6-8 months profit + assets - liability
- A year or less: depends but usually max at 4 months revenue + assets - liability
- For client list only, we assume assets value is zero except for those clients hosted a year or more.

Of course, then we need to put a proper price on assets and liabilities. If the total works out to be 12 times revenue, that would be very surprising to say the least. On the other hand, there is nothing preventing us from throwing all rules away and paying more, if we fall in love with the company, win the lottery, feel the need to gamble or something similar. :D

Excellent post Tekprio. Valuable information.

Tekprio

Your post makes far more sense where you refer to profit as opposed to turnover.

Turnover is no measure of the value of a business and is pretty well meaningless when compared to profit unless you can see a way of drastically reducing the costs associated with servicing their clients should to purchase it

It is also interesting to note the different payment terms and conditions associated with a sale which are very important to protect the purchaser

As I see it the factors a purchaser has to protect themselves against are

Clients leaving within the short term of the takeover

Ex owner starting another business and poaching their old clients back

Really I suppose those are the main things you have to protect yourself against aren't they ?

I would assume there is a non disclosure agreement before negotiations even start then an agreement vendor will not start a similar business within a given amount of time nor contact and of their previous clients but in this industry of smoke and mirrors that must be pretty hard to police ?

Turnover is an interesting data point, but it is usually only a small part in the final equation. However, a high turnover rate does raise a red flag and more likely a deal breaker.

Client exodus is always a problem (more likely if the turnover rate is high) and not an easy one to address. But what can one do, other than stipulating a final price conditioned on a certain guaranteed level of renewal? If there is no guarantee of (reasonable) future performance, the offered price will be limited accordingly.

And we would be open to hearing ideas of how to limit potential client poaching. The new host probably does not even aware of that, unless being told by the clients. So I suppose it is up to the new host to quickly win over loyalty of the existing clients.

One thing I always ask, before I take over a hosting business...is if the owner is going to start up another hosting company any time soon. Customer loyalty will cause a great number of the 'sold' customers to go right back to the original owner.

As for the ex-owner starting a similar business within a short period of time there is a step you can take to prevent this from happening (to a certain extent).
Most larger corporate sales involve a non compete clause where by they can not enter the same market within X years of the sale .
Get a lawyer do draw up a nice little contract etc.

Sorry when I said trurnover I was referring to $$ turnover which some people were suggesting as a factor in the equation when valuing a business

The point you make about client turnover is very important as well though for 2 reasons

1 Shows the satisfaction level with existing business

2 Shows potential for increased revenue and profit through improvement in this area

yup, we insist on a 2 year non-compete in all our takeovers, otherwsie you're simply funding them to start their competitive business again, and many clients go back to them beacuse of the history.

Originally posted by tekprio


Client exodus is always a problem (more likely if the turnover rate is high) and not an easy one to address. But what can one do, other than stipulating a final price conditioned on a certain guaranteed level of renewal? If there is no guarantee of (reasonable) future performance, the offered price will be limited accordingly.



This is something that is really "open" to interpretation if you ask me. We've been in business for about 2 yrs. We have very little turnover, and most of our clients are VERY HAPPY with our speed of service, and personal attention they receive....

NOW, what happens if we were to sell, and the new owners do not offer anything near what our clients are used too, and maybe their servers are always down, etc....

Then my question is this, why should we be forced to pay for the exodus of clients based on the new companies less than expected performance?

In fact I would worry about my liability to the clients who may have paid quarterly or yearly, and who are now unhappy and they're coming back to me wanting their money back because of the new companies shortcomings.

Also, as to the original post...why is it that web hosting companies hold such a small value when you go to sell one? I own other businesses, and have an (expired) real estate liscense. I don't remember the exact formula, but we used to value a business at something like profit times 7 years, plus assets, plus some blue sky if it was a good business.

Just some thoughts

I think I rememebr seeing somewhere once a pub was valued as its' annual $$ turnover which would be a lot

I think it all depends on the company's healthy finance. I mean, if a company has a good reputation and great customer loyalty... they wouldn't sell it for just 6 * 30 days profit.

I agree that the quality of the new host also plays an important role in customer retention. However, from the buyer's perspective, I know how good I am (so to speak) but I don't know how much existing client loyalty was for the old host personally, as opposed to loyalty based on good performance. One can be the best possible host but will still loose out if the existing loyalty was based strictly on the person. On the other hand, I could be a mediocre host, but as long as I deliver what was expected, then that is all fine.

So yes, it is a two way street and certainly something to negotiate. But as a buyer, I would insist on a performance guarantee. If I don't have that, it is simply prudent to put in a guesstimated risk factor and re-evaluate the offer accordingly. Then, maybe we got a deal, maybe we don't.

On the overall pricing of business, each industry has its own multiplier (x times profit/revenue, etc.) and then there is a fudge factor relating to assets, goodwill, profit margin, and $$ turnover. Hosting are relatively new compared to other businesses, so worth valuation has a wide range. Besides, there is a low entry barrier, so new host appears and disappears quickly. That makes it a volatile industry and consequently risky business.

On the other hand, what I wrote could be completely nonsense and people with money to spare can go ahead and pay 10 years of revenue to enter the wonderful world of hosting. I would be the first to sell in that case. :D

So say you want to purchase a small company that makes 200 a month, you'd pay 1,240?

Originally posted by Syx
So say you want to purchase a small company that makes 200 a month, you'd pay 1,240?

If thats profit yeah about that, but also make sure you include that if any of the clients don't go with the transition that you'd get a percentage back per a client.

I think it depends on the business, a friend sold a newspaper shop and it was based on annual profit x 3.5 plus an agreed upon lump for the lease, site location and goodwill.

I think the reason for the low value of web hosts is the virtual nature of the business and the ease with which a customer can move to another host etc...