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


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Frank Stiff's presentation at HostingCon 2011 on valuing you hosting company and why buyers and sellers can see values differently.

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

  1. 1. Why your business may be worth more (or less) to you than a buyer<br />August 8th, 2011<br />
  2. 2. Introduction<br />Background for today’s topic<br />What is your business worth to you<br />Why owners and buyers can value the same businesses differently<br />Real world examples<br />Who we are<br />Frank Stiff, President - Cheval Capital<br />Ryan Elledge, Chief Operating Officer – Codero<br />
  3. 3. There are three ways to value anything<br />Based on the future cash flows<br />Price that someone will pay for it in the market<br />Cost to build it yourself<br />In hosting, the first two methods are linked. Each is based on the future cash flow of the business. <br />Future cash flows converted to a value using a rate of return (aka discount rate)<br />Valuing Your Business<br />
  4. 4. Valuing Your Business (Cont.)<br />For example, $100/year for 5 years is worth <br />$500 at a 0% rate of return<br />$335 at a 15% rate of return<br />$244 at a 30% rate of return<br />Rate of return based on risk<br />Strategic, operating & personal issues can play a role<br />
  5. 5. Why Do Owners & Buyers See Value Differently<br />Market conditions <br />Operating efficiency of each party<br />Buyer’s business focus<br />Perception of risk <br /><ul><li>Hidden assets and liabilities</li></li></ul><li>Market Conditions That Lower Value<br />Other sellers of similar businesses<br />The buyer can purchase another similar business for less.<br />Easy to grow organically<br />The buyer can add customers organically for less.<br />Unusual market events<br />1&1<br />
  6. 6. A lot of buyers<br />When organic growth is more expensive than acquisition<br />Unique assets or a hot product<br />Location<br />Market Conditions That Raise Value<br />
  7. 7. Operating Efficiency of Each Party<br />Would your company produce more or less cash for you than the buyer?<br />Are there secondary benefits to the buyer from your products or customers? <br />Cross sales of your products & services<br />Cross sales of buyer’s products & services<br />Are there personal expenses in financials that Buyer would not incur?<br />
  8. 8. Buyer’s Business Focus<br />Does the Buyer want all of your business or just a portion of it?<br />They may value only what they want to keep<br />
  9. 9. Perception of Risk<br />Buyer’s perception of risk can have a big effect on their value<br />Typical issues<br />Customer base has close personal ties to owner<br />Highly customized services<br />Pricing significantly different than the market<br />High growth rates<br />Red Flags<br />Poor to no financial and other business records<br />Poor to no customer attrition figures<br />
  10. 10. Assets<br />Non-CF assets the buyer needs (e.g. pre ARIN /15’s)<br />Products the buyer can sell to their base<br />IP or products/services that can be spun off into a new business<br />Liabilities<br />Old equipment / future capital expenditure needs<br />Operational details that raise migration costs<br />Pay in advance customers<br />LT facilities leases<br />Hidden Assets & Liabilities<br />
  11. 11. Effect on Cash Flow and Multiples<br />
  12. 12. Effect on Cash Flow and Multiples<br />
  13. 13. Effect on Cash Flow and Multiples<br />
  14. 14. Effect on Cash Flow and Multiples<br />
  15. 15. Effect on Cash Flow and Multiples<br />
  16. 16. Effect on Cash Flow and Multiples<br />
  17. 17. The cost of any activity measured in terms of what the activity you didn’t choose<br />When you choose to sell your business you’re doing two things<br />Giving up the cash flow from the business for the purchase price<br />Getting the opportunity to do something else<br />Factor in the value of “doing something else”<br />Opportunity Cost<br />
  18. 18. Adverse market conditions – Don’t sell, wait, refocus business<br />Buyer gets less cash flow than you do – Find a better buyer<br />Buyers business focus – Find a better buyer, sell separately<br />Perception of risk – Fix your financials & systems<br />Rate of return requirements - Don’t sell, find a better buyer<br />What Do You Do If …<br />
  19. 19. (CT) acquired by Interland in 2002 – a revenue based multiple<br />CT valued its proprietary intellectual property very high – complete automation, advanced control panel<br />No multiple kicker for technology; INLD intended to migrate to own (fragmented) systems<br />Transaction Example<br />
  20. 20. (A+) spent considerable time in 2006/2007 attempting to purchase large hoster, part of a publicly traded organization<br />Target had a unique, advanced platform and significant engineering talent – both needed by A+<br />A+ offer was strictly revenue based; declining revenues led to decrease in offer and no transaction resulted<br />Completion of the transaction could have significantly enhanced A+<br />Failed Transaction<br />
  21. 21. Why your business may be worth more (or less) to you than a buyer<br />Frank Stiff<br />Cheval Capital<br /><br />Ryan Elledge<br />Codero<br /><br />August 8th, 2011<br />