My name is Tom Millitzer. I am taking over the reins of the web hosting merger and acquisition blog formally written by Paul Stapleton. I want to thank TheWhir for this opportunity and wish Paul continued success.
I am president of New Commerce Communications (NCC), a company I founded in 1994. NCC provides business brokerage services, specializing in Internet companies. NCC has sold over 100 companies with Web Hosting assets.
The #1 goal of this blog; to help position the reader to make more money when they buy or sell a web hosting company. When you put the "Web Host Company for Sale" sign out, I want it to be followed by an extra zero.
And the one time NCC business plug: If you are considering buying or selling a web hosting company, consider NCC. Our firm has the experience, professionalism, skills and contacts you require.
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Adding the extra “0”. – What I want this blog to do is to help companies increase there value in real terms. That is adapting operational, marketing and other changes that add real value. Sometimes that is avoiding mistakes. Example in point, the wrong type of incorporation at the time you start your business can cost an independent owner 30% + in a sale. Or a year before a company decides to sell it signs a 5 year contract that detracts from the price or turns off buyers. From dealing with scores of firms in the sales I want the reader to benefit from some of the various errors we have encountered.
12X (month) is the standard market value –that is wrong. We all use rules of thumb, but without the details they can get anyone trouble. Is the average rate $10 or $30 or $5 for the company you are buying? If bandwidth costs for the accounts are high maybe you should pay less. Possibly selling company specializes in serving small law firms where and the account average $75 per month, the fixed costs are low and churn is nil. There are times when 8X is a bad deal and 14X is a bargain. Every transaction should be based on its own merits, and the buyer should act in its own best interest
Predetermined valuation and hyping the market. Speaking for my company we do not have a listed price for any of the firms we represent. The seller can accept or reject any offer; this is clearly stated in all of our memorandums. We do however only accept clients that after discussion understand the general market range. It is our goal to get them the best price possible. It is a market driven system.
Tom’s job is to get the best “price” he can for his clients. Anything less would be a disservice to them. Your objective is to get a fair return on your investment.
Using current market multiples to determine “value” implies that the market is correctly priced, which we all know (or should know by now) is not always the case. Metrics used like multiples of revenue, multiples of subscribers, etc., are results, not determinants of value. They are used because they’re easy to understand and explain.
What drives value (and therefore, should drive your investment decision) are the cash flows you expect to receive and your required rate of return. What you are paying for is cash flow. And if the current and/or future expected cash flow does not support the asking price, regardless of what the market says, you can’t justify the investment.
Each side of the transaction has their own interest at stake. That’s why buyers and sellers are best served when an independent valuation is performed.
In a perfect world, everyone is rational, fair, and ethical. In the real world, businesses (and real estate) are sold, not bought – often at prices that can’t be justified.
At the same time, most companies would find it helpful to have some metric or system of metrics that would provide for a fair and consistent "starting point" for company valuations. Tom's examples of different company scenarios that would have an impact on the value of a deal are dead on. Maybe as an industry we should identify a value matrix and suggest a formula for its use? Here are some criteria that can be helpful when trying to establish a fair value:
- average rate
- average cost
- growth rate (% +/-)
- brand value (market awareness)
- long term contracts
- monthly vs. annual %
- ROI
Obviously, value to the buyer and value to the seller can be two very different things. As a buyer it might be wise to set out the maximum price you are willing to pay and start the negotiations somewhere below that.