We are currently interested in buying a company; the owner does not want to keep the company and needs the upfront cash.

We will not mention any names to protect their privacy but this is their numbers.

Total Customers 1250
Revenue monthly $15,000
Server Expenses: $4,000
Profits: $11,000/month

The Monthly revenue includes all of the monthly customers; previous prepaid accounts plus all new accounts that sign up each month.

What would be a good cash amount for this co.??

Any input would be appreciated; this will be the first company that we will buy and do not want to over pay for it. Thanks.

I would say 12 * its monthly profit.

But maybe thats too simplistic ;)

That's not total profits, just net after server expenses.

- What are the contract terms, any yearly clients?
- Who's working there? Are you legally obliged to hire them for a time?
- What's the payment plan? All cash up front or only enough to make owner happy?

Lots of questions that should be asked. This is far too general to offer any kind of usable number.

Sincerely,

-Matt

Right now, the going price is about 12X monthly gross revenue.

Well; he did gave us all of his other expenses such as office expenses; salaries; merchant fees; taxes but all of that is not important to us since we will only be buying the customer base not employees; software; etc.

The owner needs the cash so we might give him $150,000 for it and bring the 1250 customers onboard.

Servers are on anual contracts but we should not have any problems finishing the contracts.

Thanks for the details; this helped a lot.

Wow frontserve, you have "some" money to invest... :)

were going to have to break our piggy bank for this one :)

Originally posted by RackMy.com
Right now, the going price is about 12X monthly gross revenue.
WOW. :eek:

Originally posted by Aussie Bob

WOW. :eek:

I was also kind of amazed myself, to be honest...:eek:

Originally posted by RackMy.com
Right now, the going price is about 12X monthly gross revenue.

I have seen a mixed bag on this, depending on the margin on each account and taking the current poor market into consideration I have seen prices range as low as 50% of annual gross revenue and if the accounts are fairly high margin and not all annual contract waiting months before pay out it can go up to 100% of annual gross revenue

frontserve
The owner needs the cash so we might give him $150,000 for it and bring the 1250 customers onboard.

A few words of advice:
- Work up a good contract to include a non-compete for some period of time. In the contract make sure you define all of the deliverables down to and domain name transfers, passwords, records and such.

- In the contract make sure as of the date of sale the seller is held accountable and liable for any past debt.

- Require proof of the past years revenue, such as merchant account records. Make sure it is not smoking mirrors.

- DO NOT give up the whole $150,000 upfront! Either put the money and escrow account or if you feel good about the deal give up 50% up front then promise the other 50% when deliverables are completed. This will push them to complete their deliverables quickly. I have gotten burned a little by this one in the past :) You live and learn.

- MAKE SURE THE SELLER IS LEGAL AGE TO ENTER INTO A CONTRACT. I recently tried to work a deal just to find out the guy I was negotiating with finally fessed up and said his dad would be signing :) Needless to say that deal did not work out.

Other things to consider in evaluating price, specially when working with this many clients. If you have an existing customer base does the new business use like tools such as the control panel? Converting that many customers to a different control panel will be a major pain.

Make sure you are happy with the data center you have the servers in, you have a lot riding on this investment.

I think those are some of the most important things to consider.

Good luck!

So with the net profit of 11k a month,, , your telling me your going to give him 150k and take over customer base...
So in a sense you will have to keep these customers for one year before making a dime?

I would try an work out some kind of arrangment monthly, give him half revenue per month,, but if you have 150k i guess you know what your doing..

Carlos, your hosting seems fairly priced. If you take all your customers and figure out your average ticket/mo, you have what? A $15 - 20 average?


Taking this guys (I assume he counts yearly signups as part of the monthly revenue), you get $12.00/customer and to top it off, you said he has some dedicated servers? Lose those from the equation and see what the average monthly ticket is /customer. The reason this is important is that you do not want to taint your customer base unless you plan on going into those markets. What is the lowest plan these guys offer? Are you going to offer it? If you even raise the price a $.25, people will jump ship. Cheap loves cheap - Cheap people are fickle people.

Also, do you think that $150,000 in advertising couldn't bring in 1250 new customers?

Anyway, good luck. Keep us posted.

jdp,

His company will also be getting all the future signups...

for 150,000 dollar you can do a campaign to have 3,000 clients. IMHO

In regards to the payment; we are still negotiating on the amount but we feel we will do what HostingDirect said and pay it out 50/50.

With the 11k profit each month that means that we will have to wait about 10 to 12 months before we actually see a return on investment but what we really like about this company is that it has many resellers and about 40 to 50% of all new sign ups are referrals so we will actually be getting more customers in the future because of the large amount of resellers that this company has.

Actually, now that you mention the about the advertising campaign and how we can get more customers that way we may decide to do something of that sort.

Thanks all of you for your help; it has been a really help. We will keep talking to this company.

Have a good day.

I think its worth $50,000 :)

;)

Well, before coming to any conclusions on what the company is worth I would do a customer survey with about 10-20% of the current customers to assess their position with the previous company and how likely to leave they are/would be.

Are they happy with the level of service they are currently getting? Are they thinking of leaving?

If most of the customers are angry due to poor customer service then the customer base is worthless... you would have dwindling sales each month and would most definately lose money over a 1 year period.

If the customer base is solid and faithful, I would think 4-6 months revenues would be fair... plus any costs to take over the current assets such as servers, phones, leases, etc.

is that it has many resellers and about 40 to 50% of all new sign ups are referrals so we will actually be getting more customers in the future because of the large amount of resellers that this company has.

Well resellers is a double edged sword. Today they are reselling for you tomorrow they decide to get their own dedicated server and you can kiss a large chunk of your customer base good bye :).

I would also use a more scientific approach to value this company some examples can be found here :) (http://www.mergers-acquisitions.com/valu.html). I personally like a Cash flow approach.

Originally posted by dominet
for 150,000 dollar you can do a campaign to have 3,000 clients. IMHO

i'd say split your investments... put some money in sales, some in acquiring companies, and some in some fixed-rate mutual funds

breaking your bank to acquire a company isn't too wise, if you are in a position to buy, you should have left more than half of what you spent... and that should be enough cash flow to last you 6 months or even more

plus you have to take into account the pains of merging/acquiring, integrating billing systems, etc.. etc.. etc..

I'd offer a little under $150,000 eventhough, I'm sure its well worth that..

Follow your heart.

Originally posted by frontserve
were going to have to break our piggy bank for this one :)

I wish I had that kind of money in the piggy bank :eek:

Why not get a $150K loan from the bank, payable over 36 months? You'll end up paying about $5K/month. If you lose the dedicated servers, these customerswill be bringing in $15K/mo, minus the loan payment you'll end up making $10K/mo. And you won't have to break the piggybank.

Banks want collateral, and customers don't usually = collateral. You'd have to have serious credit to be able to get a line of credit that large for the acquisition of a company with almost no assets (physical).

It's a good idea, but probably wouldn't be easy to pull off...

You can get bank loans to buy other businesses, no problem. The bank will usually want to you to put about 30% down and show profitability and good management, but that shouldn't be a problem if that $150,000 cash is the result of your operations and not an equity investment or the proceeds from another loan.

Also, do you think that $150,000 in advertising couldn't bring in 1250 new customers?

I have to agree with UmBilly here. If I had $150,000 in spare cash, I would do some serious marketing. If you do the marketing thing, though, just make sure you keep enough cash on hand to handle the new expenditures that will be required on hardware and personnel to sustain the growth. It's a little more complex than that, but that's the basics of it.

Just as an aside, he's not making enough money from his 1250 customers for the business to be worth much IMHO. He's making an average of $12 per customer. That's spreading it a bit thin and you could easily lose customers when you have to raise prices later on.