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How to value a hosting company for sale?
randvegeta
Member, Host Rep
in General
LET may very well be the wrong place to ask this, and yes I am referring to the very predictable answer of $7! that will inevitably be posted FOLLOWED BY the even more predictable 'well hey this is LET so must be cheap' type answer when then asking for serious answers! Despite this, I'm still hopeful someone may actually provide a genuine answer.
So the question is actually fairly broad. How do you value a hosting company, given considerations for the following:
- Company age (many years!)
- Type of hosting (Full range, including Colo, VPS, Dedicated and Shared)
- Assets/Hardware, such as servers, switches, routers, IP addresses etc.
- Profitability
- Commitments, such as network/upstream contracts.
Is there any particular formula used to calculate the value of hosting company?
Comments
There is not a mathematical formula, it's agreed with the seller based on the revenue and upcoming earnings. Compare it with other similar sellers and define yourself the best offer you can do.
Depends on assets and profit. anything else it really just luck. age, contracts, type of hosting. You will always find someone willing to buy clients.
NET win X 24 or max. X 48 of the monthly win.
It depends on the type of hosting, but generally 13 months to 18 months of the MRR, or 4 to 8 times EBITDA
Now if you own IPs thats worth more than anything. Customers are questionable because I've seen some guys "pump-and-dump" hosting companies before a sale by taking on unsustainable products and clients then dump the company.
The correct answer is that you'll lose the value by posting this here, if you have any customers that visit here. LET members are loyal, but have no issue jumping ship if at any time they decide that you are not personally loyal to them.
It varies significantly depending on the total picture. Talk to a business broker - they will be able to give you some feedback about what they think your company is worth based on the transactions they've been involved in.
Customers who are less than a year old are worth .5 EBITA. LET type customers would be worth at most 2xEBITA, if over a year. This is because there is no customer bond there.
Long term higher paying customers maybe 4x EBITA. Servers are almost worthless unless very new, Colo agreements can be a negative. I left out D because unless you are a public corp, you are expensing everything you can. You can do a second calculation to take the depreciation into account or just raise the multipliers a little.
The hidden gem asset: Legacy class Cs An old /19 with no fees associated with it can make a company worth more than all the rest put together.
You would expect more in a non cash deal or in a roll up (somebody purchasing multiple hosts to package together for a public offering or offering to a private equity firm)
Very interesting. Thank you all for your answers. And I appreciate the seriousness of each answer! Was genuinely expecting some $7 offers
.
What is 'very new'? I wouldn't say that Xeon E3 v3 are worthless for example. Old Xeon X3430s and L5520s are kind of worthless, but it depends on what kind of hardware you already have.
I have heard this kind of guideline before but I assume it is mainly for shared hosting companies who do not have their own infrastructure. Such a calculation obviously doesn't include other assets and appears to have an assumption that the company operates purely on a rented server basis.
Hardly anyone has a /19. Indeed a /19 would be very valuable but if that was the most valuable part of the company, then what a sad state that company must be in! Most providers these days seem to have a /22 or a few /22s and again it would be very sad if the IPs would make a significant difference to the company value. Sad... but probably true for most.
Thanks again all!
Its kind of the 'industry standard' for hosting and cloud providers (us included) and would extend from shared providers into vps and cloud. The D of EBITDA is Depreciation, so covers owned equipment and infrastructure.
I dont think so. The 'E', meaning earnings, has has no relationship to assets. Depreciation would not cover owned assets. If you do not buy the equipment then of course you must remove the depreciation from the cost.
$7
@randvegetta
Earnings Before Interest Tax Depreciation and Amortization
EBITDA
If you own the assets, you depreciate them, (under US and EU GAAP certainly).
If you do not own the equipment and you rent them, then those payments would be a direct cost, and unrelated to depreciation.
US only: Most small companies expense under Section 179 instead of depreciate to make their taxable income as small as possible so if you have a $4000 item that would depreciate over 5 years that is a deduction of $800 per year but under section 179 you would deduct the entire $4000 in the first year. So I guess you should put back the D and include all the 179 deductions. There are many differences between GAAP and tax accounting. GAAP is primarily for public companies. The limit on Section 179 is $500,00 but there are certain bonuses over that amount. EBITDA I stand corrected
I see HP 96gb 2 hex core, 2ps 1 u servers in the $300 range on Ebay. That is what I mean by essentially worthless. They may be on the books of the hosting company for much more than that. Also they may have older smaller hard drives. Are they workhorses, yes, are they usable, yes. But if they are valued in the deal at $1500 and they use a lot of power and they are in a data center you may want to get out of with an outdated price for internet access (This is what I usually find) they are essentially worthless, not useless, just not worth paying a lot for. It is very hard to tell somebody that their server is worth $300 when they paid $9000 for it.
Exactly. And you mentioned above the company may be valued at 4-8x EBITDA. But unless I am missing something, it ignores the value of any assets owned. If there are no assets then there is no depreciation, but if there are assets, then actually you would make the company LESS valuable if you are only using the 4-8x EBITDA calculation. Unless you mean assets + 4-8x EBITDA.
That's rather interesting. So can just about anything be expensed? What are the limitations to this?
To be honest I don't see much harm in being able to write off all non real-estate assets immediately. Company buys $100k of hardware, does it really make much difference if the company expenses it all in 1 go or or over 5 years? Allowing to expense all in 1 go should simplify accounting and book keeping, and there should be a corresponding increase in profit in following years any way. And if the hardware is sold after being written off, then the income from the sale would be taxable any way.
The ability to write things off instantly may encourage people to spend spend spend to avoid paying taxes but that's what makes the economy move any way, so it may serve as a boost to the general economy.
Just do a google search on Section 179 and lots of info will come up. Almost anything that can be depreciated can be taken as an expense under 179 up to the 500K max per year.
When deciding whether to depreciate or expense a particular asset for which the IRS allows you some leeway, consider your company's overall financial situation as well as your future prospects. Expensing the item right away means that you will not be able to claim it as a deduction in the future. Although cash flow may be tight in the short term, you might be able to reap a greater long-term benefit if you delay some of the deduction expense until a year when your income is higher and you're paying a higher tax rate on your net income.
There is no hard and fast rule, but generally its either a multiple or revenue recurring (especially if an asset deal to buy customers) or a multiple of EBITDA, adjusted for the balance sheet value (if buying the entire company).
As an example, if you made 100,000 Dollars in profits in the last year, then 8x that would be 800k, plus the book value of any assets. If however you'd written off the asset under 179, then there would be no value to add back (but you might have cash and simiilar liquid assets, less any debts or creditors)
vpsrus
There may be other factors, especially for public companies, but for tax purposes, I cannot imagine a reason to postpone a deduction.
1. The 179 deduction may not always be there.
2. The depreciation guidelines many times call for far too long a period to depreciate an item. (For example the IRS thinks a server should be depreciated over 7 years).
3. The corp tax rates are not linear, the tax rate starts at 15% rises to 39% and drops at the highest income levels to 34%.
4. Most small corps are S corps so the deduction comes right off the owner's personal income.
5. Long term depreciation, when you can take it all in one year is the same as loaning the money to the government at 0% interest. You don't get a bigger deduction, you just get 1/7 of it each year (in the case of servers).
6. You guys should be entrepreneurs, able to put that money to good use building your businesses, or paying down debt.
dediserve:
Think of 179 as accelerated depreciation. So if you are going EBITDA you would add back the 179 deduction, same as any depreciation.
I would like to clarify that I am not a US resident and do not operate a company registered in the US so I am unfamiliar with US accounting practices.
This does not seem right to me. It would seem to me that one of the main purposes of writing things off is for tax benefits, to reduce costs. But the book value may not reflect the actual value of assets if youve written things off that still have value. Just because it is written off does not mean it has no value. So what you are saying is that if it doesn't have value on the books then it has no value and so you should not pay for it.
In fact, based on what you have said, it would seem you would be willing to pay MORE for a company that depreciates their assets very very slowly. Going straight off the official book value, seems highly flawed and probably unfair.
I'm not familiar with American taxes but it does not seem beneficial to postpone deductions. In all the countries in which we operate (or have previously operated), corporation taxes are a flat rate applicable to profits. Further more, losses can be carried over to following years. So expensing assets right away would seem to be a more efficient approach. Of course if you have a progressive corporate tax rate or are not allowed to carry over losses from previous years then yes I can see why you would want to delay depreciation. But I did not think the US has a progressive corporate tax.
To all: Section 179 is accelerated depreciation and should be added back in any EBITDA calculation, the same as any other depreciation.
To randvegeta: What you pay for a server has no relation to what value it has on the books of the selling company. It could be worth far more or far less. What you pay for a server has to be based on the fair market value.
I was using a very simple example. My point was that by writing it off entirely would have tax benefits as it would reduce the profits. But this is actually a benefit for the company and yet the calculation of 4-8x EBITDA or EBITA would completely ignore the actual value of the equipment!
To randvegeta: All I can say is games are played. Sometimes you just have to use your common sense. Companies juice their earnings all the time. Look at the quality of the customers, churn rate, motivation for sale, the equipment (not its book value), the colo contracts, etc. and their tax returns! Remember they are going to put as much lipstick on that pig as they can. (Of course it may not be a pig, it may be a gem)
Any deal based on a valuation of EBITDA would typically also contain clauses around balance sheet value, debts, and working capital adjustments.
It depends on what you are buying. If you are buying assets (like customers) the numbers are rather simpler.
Total turnover x 2 time and price can be more If your profit is high like you earn $15000/mo and profit is 70%.
Are you selling your company?
One would assume so.
As with any business the value of it is simply just how much someone is willing to pay for it. Recently in the hosting world you can expect 8-10months worth of revenue but varies greatly with what you're selling -- equipment, established site, etc.
Lots of consider, more value is put on monthly customers, established business with loyalty is a huge plus, things of this nature.
Easiest way is to put your company up for bid or pm a larger company and see what it goes for
Hope this helps.