We are considering purchasing an existing company but how much would you pay for the company if 90% of their customer base is paid yearly? The remaining 10% is paid monthly.
Three, six or 9 month revenue?
We would need to support their customer base probably for several months before we even get paid by their base.
I would assume not all of them pay at the same time so you should still get paid evenly throughout the year. Going rate is anywhere from 1-3 years total revenue for hosting firms in my experience plus additional if purchasing clients that also require development on a regular basis.
Obviously if this is a large purchase you should contact a lawyer to cover yourself.
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It depends how long the company as been going for, and the average churn rate of customers.
If it is a new company, with no track record, the value of customers paying yearly is severely diminished since the existing owner has already used the money and then you need to continue supporting that customer until their next renewal. Furthermore, you have no historical idea of renewal rates and this makes the value of each customer even harder to gauge - they may renew next year, they may not; but there's not way to tell with a new company.
On the other hand, a well established company taking yearly payments may have a historical average renewal rate, which you can use to make judgements of the value of that company - thus the yearly customer can have a much more accurate (probably higher) value placed on them.
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We normally refer to them as deferred revenues, and generally speaking, they are considered a liability and not an asset. The major questions you have to look at are the following:
1. How long have the customers been with them? (the longer they have been with them, the more valuable they are)
2. Does the contract require you to notify them if you take over their service? (no notice = more valuable)
3. Do they all pay at the beginning of the year or sporadically? (this is just cash flow purposes and how much is a deferred revenue)
4. Any other assets or liabilities?
5. How long have they been in business?
Usually you are looking at between a 3-5 year ROI, and ROI is dependent on net revs not gross.
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Yeah, I doubt that for example midphase was bought by UK2 at a 50% discount because of the yearly payments.
Indeed Dan. People immediately think "Oh annual billing, worth 4 times less".
It's all about BRAND. If the host is established, well-known, has a loyal client base then it's worth more even with 100% annual billing than your average AwesomeCpanelHostingSince2008.com with 500 clients on 2 servers billed monthly.
If all the host's clients renewed on the same day and that day for 10 months away then yea, sure - run away. But if you have $200k in annual recurring income it's like that you'll still be receiving $20k/mo.
See, people fail to realise that annual billing does recur monthly. It's just not the same client that renews monthly.
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