I'm interested in buying someone's customers, but they have many annual and bi-annual customers. Is there a certain calculation or consideration for these?

Can anyone let me know how I should deal with them?

Thanks!

What difference is there for you if their client based paid monthly or by the year? It's all money afterall. :)

When buying the monthly customers, I can expect some income to start coming in right away.. (within 30 days)

When buying the bi-annual or yearly customers, I may not see any income from them for up to 365 days. So in other words, if I buy the yearly customers.. they are worth less (??) than the monthly customers depending on how long of a delay there will be until they pay me something.

In other words, they are COSTING me money until they renew their hosting. They've already paid the other guy but if I buy them from him, then I have to service them... for free.

Plus, there's always the risk that they might not even renew their hosting with me, etc..

So I'm just wondering if there's a way to put an approximate value on bi-annual and annual customers so I can make this guy a good offer.

Thanks!

Yes, I see your point. There would be a risk when you're waiting for them to renew their plan. That's an interesting one. Is the price based around a yearly turnover/profits etc..?

The seller hasn't given a price.. they've asked me to provide one.

He hasn't been in business very long, and doesn't have many customers so there's not much "yearly" turnover, etc..

Basically, the risk with the annual/bi-annual customers is that they could leave once their contract is up (or even before), in which case I've just swallowed not only the cost of acquiring them but the cost of keeping them.. for nothing.

My question is asked because all the customers have an anniversary date that is different, so it's very hard to calculate anything.

For people who have purchased a hosting company before.. how did you deal with the "non-monthly" customers?

Thanks!

Just bought a hosting company with only yearly customers and negotiations with another company bounced.

We could not agree on the price. I calculate that I want to break even with any purchase after one year. So I offered to pay 1 year gross income for his company. This was ok with him.

However since all his customers were paying yearly and had all signed up within the last 2 months I also told him that since he had already received revenue for the next 10 months he could keep that revenue but I was deducting it from the purchase price.

After all that would be great business! Set up a hosting company, get 20-50 customers who all pay you a year in advance and then sell the company after two months charging the full amount for each customer AND keeping all the funds that have already been payed by the customers.

Me no think so :rolleyes:

So that's basically how I calculate. Simple calculation:

If you buy a hosting company with 1 client who pays $ 120.- a year (10.- a month) and he payed for the full year two months ago. Then I will pay $ 120.- for this client. However since the current owner already cashed $ 120.- from this client and most likely intends to keep that I figure he owes the company 10 months @ 10.- = $ 100 which I will promptly deduct from the payment price.

Meaning I pay him $ 20.- for his company with one client who doesn't start paying until 10 months from now.

But make no mistake! The owner STILL earned $ 120.- for this client because he keeps the funds the client payed him just 2 months ago.

I think this is still a very good deal for him. However you will find that people selling their clients see it a slightly different way. :D

They'll want to keep the $ 120.- AND charge you $ 120.- for the customer because (and I quote this from an email I received during negotions) "They will pay you $ 120.- in just 10 months so you will have your investment back in just 10 months!"

No sh!t! But they forget that the payment I receive in 10 months is for a FULL YEAR of hosting. It is NOT instant income ppl.
So in july 2003 the client pays 120 bucks which is exactly what I had to pay for the client. Nice. But since he won't pay me again until july 2004 I won't make a dime on this customer for almost TWO YEARS

Don't go for that. Invest the $ 120.- in google advertisement instead and get 2-3 customers for that price who start to pay you instantly instead of 10 months from now.

its a difficult one, if they had been around a few years you would get an idea of churn but if not its a stab in the dark, are they setup on yearly debit of their credit card? If so some who may not renew, because they've lost interest, will automatically renew and not bother cancelling

We find our 'real' churn rate on yearly customers quite low, they tend to sign up yearly because they know what they are doing and want to save a bit of cash.

By 'real' churn rate I mean those who go elsewhere

Pilgrim I sort of agree with the logic but it places no value on the lifetime value of the customer or the cost to gain the customer etc. , just what he's paid.

what I would have argued is we paid money to get the customer and that the customer will give you an income over many years, even if he's yearly he's worth more than $20.

I wouldn't have accepted $20 for him.

Look at is this way.

10 customers paying $10 per month so you value them at $120 each and pay $1200 for them after 6 months 50% have cancelled so you have paid $600 for them and you only got $300 in the bank - it's where the logic falls down.

Originally posted by bbi-linux
what I would have argued is we paid money to get the customer and that the customer will give you an income over many years, even if he's yearly he's worth more than $20.

I wouldn't have accepted $20 for him.

$ 120.- not $ 20.- Because in this fictuous calculation you just collected $ 120.- from the customer for a full year of hosting which you keep and you no longer have to do anything for it (pay servers, give support).

So in just 2 months you have made $ 120.- on this customer.

Oh, I would have been very willing to pay you $ 120.- cash per customer. However I would also insist that you hand over the money that has been payed for hosting this website for the months that have yet to come.

I'm sorry. It's not my calculation that is flawed. It is yours. At least that is my opinion. ;)

Originally posted by bbi-linux
Pilgrim I sort of agree with the logic but it places no value on the lifetime value of the customer or the cost to gain the customer etc. , just what he's paid.


I wouldn't give a dime for the lifetime value of a customer these days. Especially if they were fount in the WHT requests forum :D

LOL

Hm.... Never thought of it that way Pilgrim but I like your logic :).

I agree, thats more than fair... :)

Good job on the new logic.. *adds to brain databanks for future use*

Yeah!!! Good logic there. Can implement in future.

so you pay $120 for a customer who is paying monthly $10 per month? but not for one who is paying yearly?

If the monthly guy cancels 2 weeks after you paid $120 for him how does your logic work?

and yes the seller runs off with the $120 and you provide servers etc but the guy could be with you 10 years - believe me there are much more complex ways of working this out and assessing churn rate etc to get at a realistic price

Or am I misunderstanding your logic? If so how does your calculation work for a monthly customer? Look at it this way:

you buy 2 monthly customers for $120 each and 2 yearly customers for $20 each

the 2 monthly customers cancel after one month total loss is $220

The 2 yearly customers stay with you for 5 years total gain $1160

Simplistic but looking at just this one basic item in isolation from the whole of the business is crazy

Buying a hosting business needs more than a simple calculation on whats been paid by customers, it is a consideration but it ain't the only one. You're buying a business, something that is going to last more than one year and to expect to re-coup the purchase price in 12 months isn't something you can probably do.

One way to "protect" yourself is to buy the customers, and then pay on a monthly plan.

ie: If you are buying the bi-annual and yearly customers, then you would PAY for them AFTER they renew their contract with the new company.

For example,

If you have 2 customers who renew in 6 months.. then either offer a NPV amount for them (calculate the risk they might not renew and offer a certain amount), or wait until they actually renew, and THEN pay for them.

(Or reverse the system, and demand a refund from the seller if the customers don't renew.)

Yes, it is a bad idea because you can't trust anyone in this business.. and if the customer didn't renew you wouldn't expect to get your money back from the seller. And the seller won't trust the buyer to pay him in 6 months..

Thanks for your thoughts everyone.. I've learned that there is no real hard way to place a value on non-monthly customers. It's hit and miss when making the offer.

Cheers!

I've learned that there is no real hard way to place a value on non-monthly customers

I don't think there is an easy way to value any monthly or not, but I'd take my chances if I could buy 1000 yearly customers at $20 each if they were on $120 per year packages.

From our 3 year experience you would be doing something wrong if you lost 50% of them and a $60,000 income in month 10 for a $20,000 investment ain't bad.

Originally posted by bbi-linux
so you pay $120 for a customer who is paying monthly $10 per month? but not for one who is paying yearly?

If the monthly guy cancels 2 weeks after you paid $120 for him how does your logic work?

Well that is always possible isn't it? Nobody said it was risc free. You cannot force customers to stay. Only do your best. If he leaves you are out of $ 120.- However assuming you buy a company with more then one customer this just means that it will take a while longer before you make back your investment. An average loss of 15% of the bought customer base is to be expected.


Or am I misunderstanding your logic? If so how does your calculation work for a monthly customer? Look at it this way:

you buy 2 monthly customers for $120 each and 2 yearly customers for $20 each

the 2 monthly customers cancel after one month total loss is $220

The 2 yearly customers stay with you for 5 years total gain $1160

Simplistic but looking at just this one basic item in isolation from the whole of the business is crazy

Aye. But you can think of any number of scenario's that COULD happen but at the moment you buy the customers you do not know what is GOING to happen. Unless you find someone who is willing to sell his company and let you pay him five years later based on how many customers stayed you need some basic calculation you to determine what you are willing to spend on the purchase.

My basic rule is the one I described in the previous post. One year revenue minus the prepaid months of the yearly payers.
Be it good, be it bad. You have to start somewhere. And personally I think it is a fair price. Ofcourse if the seller does not agree then we just do not have a deal. No problem.

Buying a hosting business needs more than a simple calculation on whats been paid by customers, it is a consideration but it ain't the only one. You're buying a business, something that is going to last more than one year and to expect to re-coup the purchase price in 12 months isn't something you can probably do.

I would agree with you if you were actually interested in buying that business, building it into something, invest in it and over time make it your pride and joy.

In this case I think we're all mostly interested in the customers. I am not interested in the reseller account (I'll cancel it) I am not interested in the domain name (I'll cancel it) I am not interested in the revecom account (I'll cancel it) I am not interested in their webdesign or forums (I'll cancel it)

I just want the customers, integrate them in my own company and discontinue and throw away the rest of whatever came with the deal.

My basic rule is the one I described in the previous post. One year revenue minus the prepaid months of the yearly payers.

Ok here is how crazy that logic is:

It means that at any time in the life of a hosting business the worth of its customer base (yearly paying) fluctuates, a company with 100 yearly payers ($120 per year) who signed up in month one has a value of:

zero (the day after they paid)

to

$12,000 (the day before they pay)

So why are the yearly payers so valuable (using your logic) the day before they renew?

The logic works fine for the buyer if the yearlt's have just paid, but the seller needs just a bit of common sense to see through it.

If you wanted to buy my yearly customers I would quickly get you to sign up to your logic, then have you buy them the day before they are due to renew, every day I can stall the sale the higher the value of the customers so anyone doing this would be crazy to sell to you at month 2, they all should wait to month 11.

Originally posted by bbi-linux
If you wanted to buy my yearly customers I would quickly get you to sign up to your logic, then have you buy them the day before they are due to renew, every day I can stall the sale the higher the value of the customers so anyone doing this would be crazy to sell to you at month 2, they all should wait to month 11.

If all your yearly customers signed up on the same day.... but in reality, there's customer signups all over the calander, making it almost impossible to put a value on things... unless you actually sat down and calculated the worth of each customer individually.

yes thats true but we are testing the logic here, even if its just one customer Pilgrim is saying the day before he renews he's worth $120, the day after he's worth zero and thats crazy

Originally posted by bbi-linux


Ok here is how crazy that logic is:

a company with 100 yearly payers ($120 per year) who signed up in month one has a value of:

zero (the day after they paid)

to

$12,000 (the day before they pay)

So why are the yearly payers so valuable (using your logic) the day before they renew?


Sounds obvious to me. If they just all paid a day ago the owner received a nice sum of money for next 12 months hosting and then doesn't have to give support or pay for servers and whatnot during those 12 months. Pure profit.

While the buyer on the other hand has to pay for the servers tech support and deal with the daily crap during the time the seller is lying on the beach of Rio!

The day before they pay is obviously the day they are worth most. You say why sell them in month two. I say why sell them the day before they all pay you (minus the 15% that will cancel).
If I am the buyer I pay 12000 today and receive 10000 in income tomorrow. I'ld go for that.

If you wanted to buy my yearly customers I would quickly get you to sign up to your logic, then have you buy them the day before they are due to renew, every day I can stall the sale the higher the value of the customers so anyone doing this would be crazy to sell to you at month 2, they all should wait to month 11.

Uh.. I don't mind. Go right ahead and sell them in month 11. The only thing I would probably do is put in a clause in the contract that would cover me from too great a loss of customers.
Because I do not know how good you handle your customers and I have no influence over how many would stay/leave after the year due to your incomeptence ;) I would definatly put a clause in the contract stating something that if more then 20% leave the price will drop x. If more then 40% leave the price will drop x etc.

If you sell them in month four or so I have more then enough time to convince everybody how good a company we are so there is no need for that clause. In that case it is a business risc that you calculate.

I find this whole thread very interesting. You obviously understand my reasoning. Because you come with arguements against it that I think are arguements FOR it. I also hope Mrzippy finds it useful :)

Do you also agree that customers paying yearly are not instant income? That if they pay you in september 2002 it is not profit? Theoretically you put it on the bank and take a little away each month for keeping the company running. Then whatever you have left in september 2003, THAT is your profit. I don't want to bring cyberwings into this but they are just the largest example of what happens if you build a pyramid on your yearly signups.

Based on the above I feel that if customers payed yearly then that money belongs to the company. Not to the owner of the company. It is payment in advance for services yet to deliver. When the company is sold it stays with the company or is calculated in the selling price.

But enough about my method. How do you caluclate the value then? And do you think I pay too much or too little?

It is very interesting thread and agree arguements both ways and we are talking about hypothetical hosting company as most would have a spread of signups which as you pointed out you would not be able to apply your logic to every yearly customer - some in month one some in month 11

And yes the yearly payments - in advance - would affect the balance sheet as it is money received and service not delivered so they would be under 'short term creditors' ie if the company went bust without delivering the service for 12 months they would owe the customer a refund.

Also need to consider the companies refund policy etc.

I think valuing hosting customers is highly complex and just didn't want the logic applied without thought to everything by those who may be buying/selling. If buying the company it would depend how you valued it - balance sheet or ability to generate cash etc but thats another thread :)

Gives me something to think about if I ever think of selling :)

I think the major difference would be if someone is like you (Pilgrim) just buying customers or are purchasing a 'going concern' ie the whole business to take over and run.

I wouldnt mess with that yearly and bi-yearly and buying it.. better off with buying monthlys..

I wouldnt mess with that yearly and bi-yearly and buying it.. better off with buying monthlys..

I agree monthly gives you instant income but we have found that churn rate is much lower on yearly's so you loose less of them, if you can buy a mix I think you are doing ok

Is everyone selling up right now :)

Originally posted by bbi-linux
Is everyone selling up right now :)

Received 2 emails and a pm from companies who are intested in selling since this thread started :)

We've seen a higher rate of churn on annual and bi-annual accounts.

Even if they are annual customers it is likely that you will make money each month as they will all renew at different times

Greetings:

Here's my take:

Let's say you have 110 customers. The monthly fee is $20 per month. 10 of the customers paid annually.

Values of hosting customers can be done on a multiples of cash flow basis (the safest route) or on multiples of gross revenue (most common).

In terms of multipoles of gross revenue, values can range from 0.50 to 2.00 with one times annual revenues being most common.

The selling business will state their gross annual revenues as being $26,400 (110 x $20 x 12).

However, they received the monies from the annual customers ($2,400) up front.

A fair calculation for the buyer would be as follows (if 1 times annual revenues):

(# of monthly paying customers x 12 x $20) + (# of annual paying customers x (12 - months into annual term) x 20).

Eg.

09/03/002 - the 10 annual customers paid on 1/1/2002.

(100 x 12 x $20) = $24,000.

(10 x (12 - 9) x $20) = $600.

Total buy out would be $24,600 instead of $26,400.

Please note I work on business models from time to time as a part of my job. I'm not in the business of acquisitions, and I would double check my math and logic to see if it makes sense in the application used.

You may find substitution "12 - months into annual term" with "12 - months to renew" to be more applicable. It depends on how you want to weight the value of annual payments since the seller already received the money up front for those accounts.

Thank you.

Originally posted by mrzippy
I'm interested in buying someone's customers, but they have many annual and bi-annual customers. Is there a certain calculation or consideration for these?

Can anyone let me know how I should deal with them?

Thanks!

Hope it's not a recently failed host that lowballed yearly rates to the point of unprofitability.

The biggest problem here is there's no way to calculate the turn over rate. The company is new and the customers are also new. How do you know if they will renew. You don't. That's the problem of purchasing clients these days. It's a game now., everyone sells their customers to make the fast cash. It's silly really because they are not even turning over their books. Whenn the big companies sell, they turn over everything. Well most of the time. They turn over their books so you have all of the billing info and customers history. They only take their profits.
I agree with Pilgrim, since you have the money, I won't pay you the full money for them. I'll deducte it.

Also, don't ya love these customers when they decide they don't want the hosting now when their renewal comes up. Doesn't happen often but..

6 months later, you bill again .. You charge again and then the day after, they decide they don't want their website anymore and ask for a refund ..

We have a policy basically like this, although more detailed :

Although no notice is required, and there is no cancellation fee, all fees paid for service prior to the notice of cancellation are non-refundable.

So, what do ya do for the customer, do ya make them stick to the TOS or do ya feel sorry for them and give them the refund?

Everybody talk about gross income but what about net income?
For example we have 2 companies (Company A and Company B) both have 100 customers paying $120 a year for an yearly gross income of $12,000. Company A may be offering their customers more services and bandwith like 10 GB per month while Company B offers their customers less services and 1 Gb per month meaning less overhead costs and more profit. Using the gross X 1yr formula both are worth $12,000. But Company B overhead would be a lot lower then Company A allowing you to make ur money back faster so Comp B should be worth alot more then Comp A.

:cartman: :cartman: