HostingCon 2011 - Why Your Business May Be Worth More (or Less) To You Than A Buyer

Why your business may be worth more (or less) to you than a buyer
August 8th, 2011

Introduction
Background for today’s topic
What is your business worth to you
Why owners and buyers can value the same businesses differently
Real world examples
Who we are
Frank Stiff, President - Cheval Capital
Ryan Elledge, Chief Operating Officer – Codero

There are three ways to value anything
Based on the future cash flows
Price that someone will pay for it in the market
Cost to build it yourself
In hosting, the first two methods are linked. Each is based on the future cash flow of the business.
Future cash flows converted to a value using a rate of return (aka discount rate)
Valuing Your Business

Valuing Your Business (Cont.)
For example, $100/year for 5 years is worth
$500 at a 0% rate of return
Rate of return based on risk
Strategic, operating & personal issues can play a role

Why Do Owners & Buyers See Value Differently
Market conditions
Operating efficiency of each party
Buyer’s business focus
Perception of risk
Hidden assets and liabilities

Market Conditions That Lower Value
Other sellers of similar businesses
The buyer can purchase another similar business for less.
Easy to grow organically
The buyer can add customers organically for less.
Unusual market events
1&1

A lot of buyers
When organic growth is more expensive than acquisition
Unique assets or a hot product
Location
Market Conditions That Raise Value

Operating Efficiency of Each Party
Would your company produce more or less cash for you than the buyer?
Are there secondary benefits to the buyer from your products or customers?
Cross sales of your products & services
Cross sales of buyer’s products & services
Are there personal expenses in financials that Buyer would not incur?

Buyer’s Business Focus
Does the Buyer want all of your business or just a portion of it?
They may value only what they want to keep

Perception of Risk
Buyer’s perception of risk can have a big effect on their value
Typical issues
Customer base has close personal ties to owner
Highly customized services
Pricing significantly different than the market
High growth rates
Red Flags
Poor to no financial and other business records
Poor to no customer attrition figures

Assets
Non-CF assets the buyer needs (e.g. pre ARIN /15’s)
Products the buyer can sell to their base
IP or products/services that can be spun off into a new business
Liabilities
Old equipment / future capital expenditure needs
Operational details that raise migration costs
Pay in advance customers
LT facilities leases
Hidden Assets & Liabilities

Effect on Cash Flow and Multiples

The cost of any activity measured in terms of what the activity you didn’t choose
When you choose to sell your business you’re doing two things
Giving up the cash flow from the business for the purchase price
Getting the opportunity to do something else
Factor in the value of “doing something else”
Opportunity Cost

Adverse market conditions – Don’t sell, wait, refocus business
Buyer gets less cash flow than you do – Find a better buyer
Buyers business focus – Find a better buyer, sell separately
Perception of risk – Fix your financials & systems
Rate of return requirements - Don’t sell, find a better buyer
What Do You Do If …

CommuniTech.net (CT) acquired by Interland in 2002 – a revenue based multiple
CT valued its proprietary intellectual property very high – complete automation, advanced control panel
No multiple kicker for technology; INLD intended to migrate to own (fragmented) systems
Transaction Example

Aplus.net (A+) spent considerable time in 2006/2007 attempting to purchase large hoster, part of a publicly traded organization
Target had a unique, advanced platform and significant engineering talent – both needed by A+
A+ offer was strictly revenue based; declining revenues led to decrease in offer and no transaction resulted
Completion of the transaction could have significantly enhanced A+
Failed Transaction

Why your business may be worth more (or less) to you than a buyer
Frank Stiff
Cheval Capital
fstiff@chevalcap.com
Ryan Elledge
Codero
ryane@codero.com
August 8th, 2011

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HostingCon 2011 - Why Your Business May Be Worth More (or Less) To You Than A Buyer

by Cheval Capital, Inc on Aug 09, 2011

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HostingCon 2011 - Why Your Business May Be Worth More (or Less) To You Than A Buyer — Presentation Transcript