Hosting Con 2009 Interactive Workshop (Final Web)


Published on

Hillary Stiff's HostingCon 2009 Interactive Talk on Valuing and Structuring Hosting company transactions.

  • Be the first to comment

  • Be the first to like this

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

Hosting Con 2009 Interactive Workshop (Final Web)

  1. 1. Interactive Workshop: Valuing and Structuring Web Hosting Company Acquisitions Hillary Stiff, Managing Director C HEVAL C APITAL , I NC . [email_address]
  2. 2. Disclaimer <ul><li>This presentation is for discussion purposes and is not financial advice or a comprehensive discussion of the issues involved. </li></ul><ul><li>THE PURCHASE OF ASSETS OR BUSINESSES IS RISKY. SMALL BUSINESSES ARE OFTEN DEVELOPMENT STAGE OPPORTUNITIES WITH SIGNIFICANT FINANCIAL, TECHNOLOGICAL AND OPERATING HURDLES TO OVERCOME. PURCHASERS HAVE A MEANINGFUL RISK OF LOSS OF THEIR ENTIRE PURCHASE PRICE. </li></ul><ul><li>Please be sure to consult your financial advisors when valuing a company, considering the sale or purchase of a business or making other financial decisions. </li></ul>
  3. 3. Today’s Goal & Agenda <ul><li>What determines the value and structure of a hosting company purchase/sale </li></ul><ul><ul><li>Valuation Categories & Drivers </li></ul></ul><ul><ul><li>Buyer Types </li></ul></ul><ul><li>“ Let’s Make A Deal” Game </li></ul><ul><li>Extras! </li></ul><ul><ul><li>Valuations - Historic, Current & Future </li></ul></ul><ul><ul><li>Valuation Issues </li></ul></ul><ul><ul><li>And more! </li></ul></ul>
  4. 4. Background – Cheval Capital <ul><li>Who we are </li></ul><ul><ul><li>Investment bankers active in hosting/ISPs since 1996 </li></ul></ul><ul><ul><li>Completed over 145 Hosting/ISP acquisitions including transactions such as the Endurance/iPower merger </li></ul></ul><ul><li>Who we have worked for </li></ul><ul><ul><li>Endurance Int’l Group, Rackspace, Hostopia, Midphase, Jumpline, Verio, etc. </li></ul></ul><ul><li>What we do </li></ul><ul><ul><li>Represent buyers & sellers of hosting, telecom and related companies </li></ul></ul><ul><ul><li>Distribute a weekly listing of sellers, creating a deal marketplace for small and mid sized companies </li></ul></ul>
  5. 5. Valuation Categories & Drivers <ul><li>What are examples of drivers that affect the valuation of a hosting business? </li></ul><ul><li>Major Categories: </li></ul><ul><ul><li>Financial </li></ul></ul><ul><ul><li>Technical/Engineering </li></ul></ul><ul><ul><li>Customers </li></ul></ul><ul><ul><li>Product/Service offerings </li></ul></ul><ul><ul><li>Legal </li></ul></ul><ul><ul><li>Qualitative </li></ul></ul><ul><ul><li>Buyer </li></ul></ul>
  6. 6. Financial Drivers <ul><li>Total Revenue & Cash Flow (incl. growth) </li></ul><ul><li>ARPU – Average Revenue Per User </li></ul><ul><li>Profitability – NI, NPBT, EBIT, EBITDA, Gross Margin </li></ul><ul><li>Cash collected vs. revenue recognition </li></ul><ul><li>Recurring vs. non-recurring revenue </li></ul><ul><li>Customer credit card information </li></ul><ul><li>Billing system </li></ul><ul><li>Deferred revenue </li></ul><ul><li>Stability of Rev/CF </li></ul><ul><li>Balance Sheet & debt </li></ul><ul><li>Equity/ownership structure </li></ul><ul><li>Equipment owned vs. leased </li></ul><ul><li>Billing method </li></ul><ul><li>Billing cycle distribution </li></ul><ul><li>Refund/chargeback history </li></ul><ul><li>Audits </li></ul><ul><li>Owner related expenses ex. cars, cell phones, T&A </li></ul><ul><li>Ongoing obligations (e.g. datacenter) </li></ul><ul><li>Pre-paid expenses </li></ul><ul><li>Cost of goods sold </li></ul><ul><li>Taxes/NOL’s – Net Operating Loss </li></ul><ul><li>Forecast and projections </li></ul><ul><li>Recurring vs. non-recurring expenses </li></ul>
  7. 7. Technical/Engineering Drivers <ul><li>Control panel (proprietary vs. off-the-shelf) </li></ul><ul><li>Platform – Unix vs. Windows </li></ul><ul><li>Ability to migrate customers </li></ul><ul><li>Infrastructure owned vs. leased </li></ul><ul><li>Age of infrastructure </li></ul><ul><li>Resource usage (Bandwidth, Storage, etc) </li></ul><ul><li>IP addresses (ARIN vs. borrowed; excess) </li></ul><ul><li>Efficiency of infrastructure </li></ul><ul><li>Capital expenditure needs </li></ul><ul><li>Software developed </li></ul><ul><li>Control panel fit with buyer </li></ul>
  8. 8. Customer Drivers <ul><li>Growth rate </li></ul><ul><li>Loss/churn rate </li></ul><ul><li>Cost to acquire a customer </li></ul><ul><li>Brands </li></ul><ul><li>Pricing strategy </li></ul><ul><li>Age of customer base </li></ul><ul><li>Resellers/affiliates and their cost </li></ul><ul><li>Advertising methods </li></ul><ul><li>Customer support metrics/volumes </li></ul><ul><li>Customer satisfaction </li></ul><ul><li>Domain name renewal rate </li></ul><ul><li>Commissions/sales incentives </li></ul><ul><li>Sales/Marketing employees </li></ul><ul><li>Cust. Support hours </li></ul><ul><li>Type of support offered (phone, email, etc.) </li></ul><ul><li>In-house vs. outsourced support. </li></ul>
  9. 9. Product/Service Drivers <ul><li>Type of hosting offerings </li></ul><ul><li>Package configuration </li></ul><ul><li>Overselling </li></ul><ul><li>Customer product/service usage </li></ul><ul><li>Breadth of offerings </li></ul><ul><li>Internal vs. 3 rd party offerings </li></ul><ul><li>New product development cycles </li></ul><ul><li>Up-selling strategy </li></ul>
  10. 10. Legal Drivers <ul><li>How is purchase structured - Asset vs. Stock </li></ul><ul><li>Customer contracts </li></ul><ul><li>Potential liabilities/pending litigation </li></ul><ul><li>Legal/corporate structure </li></ul><ul><li>Royalty/licensing agreements </li></ul><ul><li>Environmental matters </li></ul><ul><li>Trademarks/Intellectual Property </li></ul><ul><li>Employee benefits programs </li></ul><ul><li>Severance agreements </li></ul><ul><li>Customer disputes </li></ul>
  11. 11. Qualitative Drivers <ul><li>How well do the two companies fit </li></ul><ul><ul><li>“ Personality” </li></ul></ul><ul><ul><li>Type of Business </li></ul></ul><ul><ul><li>People </li></ul></ul><ul><li>Cleanliness of data, records and reports </li></ul><ul><ul><li>Willingness to share </li></ul></ul><ul><li>Degree of certainty & trust </li></ul><ul><li>Culture </li></ul><ul><li>Reputation </li></ul><ul><li>Market Position </li></ul>
  12. 12. Buyer Drivers <ul><li>Consolidators buy revenue/customers to add to consolidator’s existing infrastructure </li></ul><ul><ul><li>They care about the cash the seller’s customers will generate on their platform </li></ul></ul><ul><li>Strategic/Platform buyers seek to fulfill strategic goals when acquisition is quicker or cheaper than building from scratch </li></ul><ul><ul><li>They care about the current business as a platform for the buyer’s future operations </li></ul></ul><ul><li>Buyers pay more for companies that fit </li></ul>
  13. 13. Valuation Categories & Drivers <ul><li>What are common themes among almost all of these drivers? </li></ul><ul><li>Most drivers relate to cash; either (a) the amount the business will produce (for the buyer) or (b) the risk of getting it </li></ul><ul><li>The relative importance of any of these drivers depends on each individual company and buyer </li></ul>
  14. 14. “Let’s Make A Deal” <ul><li>Win amazing gifts and prizes! </li></ul><ul><li>Impress your friends and colleagues! </li></ul><ul><li>Did we mention the great prizes? </li></ul>
  15. 15. Teams <ul><li>Consolidators tend to care about the cash the seller’s customers will generate on their platform </li></ul><ul><li>Strategic/Platform buyers tend to care about; </li></ul><ul><ul><li>The current business as a platform for the buyer’s future operations. </li></ul></ul><ul><ul><li>A technology or product that can be cross-sold to existing customers. </li></ul></ul>
  16. 16. Case # 1 <ul><li>A hosting company has been adding new customers rapidly but has a high churn rate due to poor customer service and a recent outage. </li></ul><ul><li>Q - How do you (consolidator or strategic) view this and why? </li></ul><ul><li>A - The rapid growth, assuming it is cost effective, would be appealing to both. The Consolidator may look at the poor customer service and outages as something that is easy to fix on migration. The Strategic may believe it is an inappropriate platform to build a business on. </li></ul>
  17. 17. Case # 2 <ul><li>A hosting company has a practice of selling pay-in-advance plans. They recently ran a popular promotion that encouraged customers to renew for an additional three years. </li></ul><ul><li>Q - Why is this significant? </li></ul><ul><li>A - The seller has taken a chunk of the revenues for the next three years out of the business. The buyer will have to support these customers with no cash coming in the door. </li></ul>
  18. 18. Case # 3 <ul><li>A hoster that bills the majority of its customers monthly by credit card does not have access to the customer credit card information. </li></ul><ul><li>Q - For which type of buyer (strategic or consolidator) is this generally likely to be a bigger issue post-closing? </li></ul><ul><li>A - Consolidator. The Consolidator needs the credit card information in order to migrate the customers onto its billing systems. The Strategic can continue using the existing billing platform and obtain the credit card information slowly over time. </li></ul>
  19. 19. Case # 4 <ul><li>A dedicated hoster has leased servers in a number of data centers in different geographic areas. (All leases are month-to-month.) </li></ul><ul><li>Q - How would this affect your (strategic/consolidator) likely valuation? </li></ul><ul><li>A - Strategic – If the equipment is spread out too much, there is no platform/base on which to build. Consolidator – May make the physical migration more costly and cumbersome. </li></ul>
  20. 20. Case # 5 <ul><li>A hoster is adding customers quickly through affiliate sales at a price equal to one year’s revenue. </li></ul><ul><li>Q - What do you need to know in order to determine the value of these customers? </li></ul><ul><li>A - A buyer would need to understand how long the customers could be expected to stay on the system. Also helpful would be knowing if the buyer would be able to continue to add customers through this relationship. </li></ul>
  21. 21. Case # 6 <ul><li>Consider two hosters: (A) has a business that largely consists of a single hosting product (e.g. VPS); and (B) has a multi-product business (e.g. shared, VPS and dedicated) </li></ul><ul><li>Q - Which hoster may have a larger pool of prospective buyers? </li></ul><ul><li>A - The single product line business would typically have a larger pool of potential buyers. They would both have the single and multi-product companies as prospective buyers while the multi-product companies have only the other multi-product companies as prospective buyers. </li></ul>
  22. 22. Case # 7 <ul><li>A co-location company’s owners run a lot of their personal expenses through the company including car leases for them and their two children, gas, cell phones, and a couple of trips each year. </li></ul><ul><li>Q - What would some issues be in valuing and acquiring this company. </li></ul><ul><li>A - Determining the cash flow of the business without these expenses. Are there any tax mis-statement issues that could affect the new owner. </li></ul>
  23. 23. Case # 8 <ul><li>A hoster has a proprietary control panel. </li></ul><ul><li>Q - How might this affect your (strategic/consolidator) valuation? Does your answer change if it is well documented and full featured ? </li></ul><ul><li>A - Consolidator – No affect as long as (1) the customers could be migrated off the control panel without difficulty; and (2) the buyer’s control panel has the same or better features. Strategic – Possibly negative if the control panel was unsuitable for future growth. If it was well document and full featured it may add some value for the Strategic. </li></ul>
  24. 24. Case # 9 <ul><li>A hosting company has 18 months remaining on its data center lease and 12 months remaining on its office/support center lease. </li></ul><ul><li>Q - For which type of buyer might these leases more affect the price they are able to offer? </li></ul><ul><li>A - Neither. The Consolidator doesn’t care as they would be purchasing the customers and these leases would be the responsibility of the sellers. The Strategic would generally be looking to continue operations as-is for some period of time. </li></ul>
  25. 25. Case # 10 <ul><li>A hoster has significant revenues from domain registration and renewals </li></ul><ul><li>Q - How do you value these revenues? </li></ul><ul><li>A - The valuation would depend on the (1) the cash flow margin for those revenues; (2) the renewal rate; and (3) how many are associated with a hosting account. </li></ul>
  26. 26. Case # 11 <ul><li>A shared web hosting company has what is considered in the industry as a “high ARPU”. </li></ul><ul><li>Q - Why could this be a negative? </li></ul><ul><li>A - The customers may be paying an above market price and likely to move to other, lower priced options. This may be exacerbated if they are “jostled” during an acquisition. Note: There was some disagreement over this answer. Some felt it was more of a positive than most perceived. </li></ul>
  27. 27. Case # 12 <ul><li>A company has a significant amount of website design and development business. </li></ul><ul><li>Q - Do you value this revenue? </li></ul><ul><li>A - If the Consolidator provides web design then this business may have some value. This should have some value for the Strategic if they are keeping this line of business and it has been run profitably. </li></ul>
  28. 28. Case # 13 <ul><li>A hosting company has outstanding liabilities to several parties. </li></ul><ul><li>Q - For what type of buyer might this affect the price they are able to offer more? </li></ul><ul><li>A - Probably the Strategic buyer’s offer price. If the Strategic purchases the company and steps into the obligations of the seller, then these liabilities would reduce the price they could offer. If the Consolidator purchases only the customers they would leave the liabilities with the seller and the liabilities would not affect their offer price. </li></ul>
  29. 29. Case # 14 <ul><li>A web hosting company has an infrastructure that has many older devices. </li></ul><ul><li>Q - For what type of buyer (consolidator or strategic) might this affect the price they are able to offer more and why? </li></ul><ul><li>A - Probably the Strategic buyer as they would be relying on the existing infrastructure going forward. If it required an unusual amount of capital expenditures, then those would lower the price they could offer or cause them not to bid. If the Consolidator was moving the customers onto its own infrastructure this may not have any affect. </li></ul>
  30. 30. Case # 15 <ul><li>A hosting company has a base of largely long standing, customers who are very satisfied with their service and paying market prices. However, the company has not created new offers or products for these customers in some time. </li></ul><ul><li>Q - How would this generally affect your valuation and why? </li></ul><ul><li>A - Positively for both – There may be an opportunity to sell new products and services to these customers. </li></ul>
  31. 31. And the winner is … <ul><li>Thanks to everyone for participating and a special thanks to Elliott Noss of Tucows/OpenSRS. </li></ul><ul><li>Be sure to pick up a copy of the slides from us ( ) or HostingCon. There are 15 extra slides on valuation and valuation issues. </li></ul>
  32. 32. Extra Slides! <ul><li>Comparable Valuations </li></ul><ul><li>Public Company Valuations </li></ul><ul><li>Private Company Valuations in Hosting - Past, Present and Future) </li></ul><ul><li>Summary of some key valuation issues </li></ul><ul><ul><li>Price Versus Terms </li></ul></ul><ul><ul><li>Evaluating an offer </li></ul></ul><ul><ul><li>Leases </li></ul></ul><ul><ul><li>Deferred Revenue </li></ul></ul><ul><ul><li>High Growth </li></ul></ul>
  33. 33. Comparable Valuations <ul><li>One common way to determine an appropriate valuation for you company is to look at the “comps” or comparables </li></ul><ul><li>Comparables could be the relative values of the public hosters or the sale prices of companies similar to yours </li></ul><ul><li>Be careful about finding true comparables for your business </li></ul><ul><li>Comparables are not the total story, each seller and buyer are unique as are transaction terms, both affect prices </li></ul><ul><li>Look carefully at EBITDA, it can vary greatly between two very similar hosters due to such things as affiliate marketing costs, operating leases for equipment, accounting method (cash vs. accrual), personal expenses, etc. </li></ul><ul><li>The M&A market for hosters is competitive - if a buyer offers too little, sellers have other options and vice versa </li></ul>
  34. 34. Public Companies – July 21, 2009 <ul><li>Annualized Enterprise Region/Company Revs ($ mil) Value/Re </li></ul><ul><li>North America </li></ul><ul><li>Savvis $ 886 1.4x </li></ul><ul><li>Rackspace $ 580 3.1x </li></ul><ul><li>Navisite $ 149 1.2x </li></ul><ul><li>Web.Com Group $ 111 1.4x </li></ul><ul><li>Peer1 $ 91 1.5x </li></ul><ul><li>Group iWeb $ 25 1.7x </li></ul><ul><li>Europe </li></ul><ul><li>United Internet $ 2,403 1.7x </li></ul><ul><li>Dada $ 218 1.0x </li></ul><ul><li>Net Benefit Gp $ 64 1.7x </li></ul><ul><li>IOMart Gp $ 19 3.0x </li></ul><ul><li>Australia </li></ul><ul><li>Melbourne IT $ 151 1.3x </li></ul>
  35. 35. Private Valuations ‘96 to ‘07 <ul><li>Another comparable are the prices hosting companies are being bought and sold for </li></ul><ul><li>Industry prices peaked at the end of the 1990’s and drifted downward until 2007 </li></ul><ul><li>Prices in the U.S. were very well defined during the 2005-2007 period due to a large number of transactions. Almost all were between 1.0x to 2.0x annualized revenues </li></ul><ul><ul><li>Hostway/Affinity; Terremark/Data Return; Navisite/Alabanza; Endurance/iPower; Endurance/PowWeb; WebSitePros/Web.Com; Endurance/FatCow </li></ul></ul><ul><li>European transactions seemed to get a significant premium </li></ul><ul><ul><li>1&1/Fasthosts; HostEurope/Pipex </li></ul></ul>
  36. 36. Valuations ‘07 to Mid-2008 <ul><li>Some larger, apparently strategic transactions at higher multiples in both hosting & adjacent industry segments </li></ul><ul><ul><li>Intuit/Homestead; Abry/HostedSolutions </li></ul></ul><ul><li>Transactions occurred with new entrants & capital coming into hosting </li></ul><ul><ul><li>Deluxe/Hostopia; Wachovia/HostMySite; Spire/Carpathia </li></ul></ul><ul><li>European transactions at a premium </li></ul><ul><li>Very active & vibrant market </li></ul><ul><li>A number of larger deals were completed with great price variation in some transactions </li></ul><ul><ul><li>Deluxe/Hostopia; Wachovia/HostMySite; Intuit/Homestead; Abry/HostedSolutions; Dada/Namesco; Layered Tech/Fastservers </li></ul></ul><ul><li>The tight pricing band seemed to have been broken with more variation in prices; high and low </li></ul><ul><li>General trend seemed to have been on the uptick </li></ul><ul><li>Strategic buyers in the market for the first time in a long while </li></ul>
  37. 37. Valuations Mid ‘08 to Current <ul><li>Fewer completed transactions </li></ul><ul><li>Fewer buyers </li></ul><ul><ul><li>Increased caution due to economic concerns </li></ul></ul><ul><ul><li>Less debt/financing available </li></ul></ul><ul><li>Fewer sellers </li></ul><ul><ul><li>Sellers have fewer alternative business opportunities </li></ul></ul><ul><ul><li>Sellers believe current market values are lower than what they could get in the future </li></ul></ul><ul><ul><li>Few distressed properties </li></ul></ul><ul><li>Prices are back to 2005-2007 levels </li></ul><ul><li>Hosting revenues seem to be stable or slightly declining </li></ul><ul><li>Our deep pocketed buyer is still buying at a premium </li></ul>
  38. 38. Future Valuations <ul><li>The outlook is cloudier than any time in recent memory </li></ul><ul><li>Positives </li></ul><ul><ul><li>We have large buyers still buying at premium prices </li></ul></ul><ul><ul><li>Industry revenues & cash flow have generally held up </li></ul></ul><ul><li>Concerns </li></ul><ul><ul><li>When current buyers use up their acquisition cash they may not be able to replace it and may have to stop buying </li></ul></ul><ul><ul><li>Underlying economics of the business may deteriorate with the economy and continued competition of single purpose hosters (blog platforms, photo sites, social networks, etc.), etc. </li></ul></ul><ul><ul><li>Organic growth is difficult </li></ul></ul>
  39. 39. Some Valuation Issues <ul><li>Price Versus Terms </li></ul><ul><li>Evaluating a Purchase Offer </li></ul><ul><li>Leases </li></ul><ul><li>Deferred Revenue </li></ul><ul><li>High Growth </li></ul>
  40. 40. Price vs. Terms - 1 <ul><li>Non-price terms of a deal can have a major impact on the price paid </li></ul><ul><li>Generally; </li></ul><ul><ul><li>(1) The more risk a party bears the more compensation they should get for taking those risks; and </li></ul></ul><ul><ul><li>(2) Money today is worth more than money tomorrow. </li></ul></ul><ul><li>Some rules of thumb; </li></ul><ul><ul><li>Payment timing (1 & 2 above). Buyers that pay more of the purchase price at closing would likely pay a relatively lower price than those that pay more over time </li></ul></ul><ul><ul><li>Payment and transaction certainty (1 above).  Buyers that offer more assurance that they will make payments would likely pay a relatively lower price than others </li></ul></ul><ul><ul><li>Churn protection (1).  Buyers typically pay more if a portion of the purchase price was tied to customer retention (as it reduces their risk)  </li></ul></ul><ul><ul><li>Other legal issues.  There are a variety of legal issues in most deals that can affect the risk to either party, and as a result, the price  </li></ul></ul>
  41. 41. Price vs. Terms - 2 <ul><li>A highly subjective chart on 2008 data </li></ul><ul><li>12 hosting transactions. </li></ul><ul><li>Chart based on risk of terms to buyer (5=high) </li></ul><ul><li>Seller risk chart would generally be a mirror image. </li></ul><ul><li>Note fluctuation at constant risk levels and at decreasing risk. </li></ul>
  42. 42. Evaluating An Offer - 1 <ul><li>One way to evaluate a purchase proposal is to compare it to the amount of cash you are getting from your business </li></ul><ul><li>The cash you get from your business consists of; </li></ul><ul><ul><ul><li>Salary, bonuses and other distributions of cash to its owners </li></ul></ul></ul><ul><ul><ul><li>Cash value of benefits, incl. health care, car leases, etc. </li></ul></ul></ul><ul><ul><ul><li>Cash building up in the business that won’t be used </li></ul></ul></ul><ul><ul><li>Less what your business may be costing you </li></ul></ul><ul><ul><ul><li>Salary, bonus, benefits you would earn if you didn’t work in the business </li></ul></ul></ul><ul><ul><ul><li>Cash you are/have put in to the business </li></ul></ul></ul><ul><ul><ul><li>Other cash “Opportunity Costs” of the business (for example, rent from a building you may own that the business is using.) </li></ul></ul></ul>
  43. 43. Evaluating An Offer - 2 <ul><li>A - The seller would need 13.7 years of cash flow to equal a price of 1.3x revenue </li></ul><ul><li>B - The seller would need 5.2 years of cash flow to equal a price of 1.3x revenue. </li></ul><ul><li>* Does not include taxes on income or sale. </li></ul><ul><li>* Example only, does not reflect any company. </li></ul>1.3x 1.3x Price/Revs $13.00 $13.00 Purch Price $2.50 $0.95 Owner CF 5.2x 13.7 Price/OCF 5.0% 0.5% Capex % 15.0% 45.0% Sales % 30.0% 25.0% G&A % 25.0% 20.0% COGS % $10.00 $10.00 Revenues Hoster B Hoster A
  44. 44. Leases <ul><li>The typical view is that the physical plant of a company generates its revenues and cash flow and thus deemed included in the purchase price </li></ul><ul><li>Equipment that is leased, rented or that must be otherwise replaced by the buyer, generally reduces the price the buyer can pay </li></ul><ul><li>The purchase price the buyer can pay is reduced by; </li></ul><ul><ul><li>The amount of debt and leases assumed by the buyer </li></ul></ul><ul><ul><li>The cost of equipment the buyer must replace </li></ul></ul><ul><li>When the buyer only takes customers, the seller would have to repay outstanding debt/leases out of the price. </li></ul>
  45. 45. Deferred Revenues - I <ul><li>Deferred Revenue - Collecting payment today for services to be delivered in the future creates a liability </li></ul><ul><li>Buyer’s adjustment for Deferred Revenue can vary from; </li></ul><ul><ul><li>No adjustment </li></ul></ul><ul><ul><li>An adjustment based on the cost of providing the service </li></ul></ul><ul><ul><li>A $ for $ reduction for the amount of the liability </li></ul></ul><ul><li>Double whammy for prepaids >1 year. Often an adjustment for the cost of providing service and the buyer typically is willing to pay little for these customers </li></ul><ul><li>Issue is risk and, for some buyers, accounting. Cash flow should not necessarily be the issue (see following cash flow slide) </li></ul>
  46. 46. Deferred Revenues - II Cash Flow Comparison – Annual vs. Monthly Customers $180 $180 $180 $180 $180 $180 CF with Monthly Pay 12 12 12 12 12 12 Number of Subs Renewing All Monthly Cust $180 $180 $180 $180 $180 $180 CF with Annual Pay 1 1 1 1 1 1 Number of Subs Renewing Jun May Apr Mar Feb Jan All Annual Cust 12 Total Customers $15 Cash/Sub/Month
  47. 47. High Growth <ul><li>Very high growth companies are a unique valuation challenge </li></ul><ul><li>Growth engine can be quite valuable if new customers are of good quality and their cost to add is reasonable </li></ul><ul><li>The valuation challenge comes from; </li></ul><ul><ul><li>It can be difficult to tell if customers are of good quality until they have a renewal history </li></ul></ul><ul><ul><li>It can be difficult for buyers to be confident that growth will continue </li></ul></ul><ul><li>There is likely to be a smaller pool of potential buyers during the high growth stage </li></ul>
  48. 48. Disclaimer <ul><li>This presentation is for discussion purposes and not financial advice or a comprehensive discussion of the issues.  </li></ul><ul><li>THE PURCHASE OF ASSETS OR BUSINESSES IS RISKY. SMALL BUSINESSES ARE OFTEN DEVELOPMENT STAGE OPPORTUNITIES WITH SIGNIFICANT FINANCIAL, TECHNOLOGICAL AND OPERATING HURDLES TO OVERCOME. PURCHASERS HAVE A MEANINGFUL RISK OF LOSS OF THEIR ENTIRE PURCHASE PRICE. </li></ul><ul><li>Please be sure to consult your financial advisors when valuing a company, considering the sale or purchase of a business or making other financial decisions. </li></ul>
  49. 49. Please Complete Survey! Hillary Stiff, C HEVAL C APITAL , I NC . Session Track: Business Development Session Title: Interactive Workshop: Valuing and Structuring Web Hosting Acquisitions