Web Hosting Talk : Web Hosting Main Forums : Web Hosting : how to buy a webhosting company

[a1nerd]

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.

[kathystover]

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

Where? I'd like to find them!

[a1nerd]

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

[Gabriel Murphy]

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.

[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.

[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.

[centrahost]

NexDog is right on!

And that about sums that up exactly!

[a1nerd]

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

[Gabriel Murphy]

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.

[FHDave]

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.

[Gabriel Murphy]

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

[NexDog]

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.

[Gabriel Murphy]

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?

[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.

[BeDifferentSolutions]

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.