How to Value a Hosting Business

October 19, 2007 by David Mathews

Every owner of a hosting business wants to know, “how much is my hosting business worth?”  To answer this question, you must first answer other questions:  What is the purpose of the valuation?  What type of accounts do you have?  What are your pricing and service plan?  What is your market niche?  How do you operate the business?  How much labor is required to support the operations?  What control panel do you use?   And many, many more  …

Value is determined in the context of several situations.  For most entrepreneurs, the purpose of valuing a business relates to selling, or buying other businesses or hosting accounts.  However, sometimes the purpose of valuing the business is for tax, family transfer, or financial performance comparisons. 

Many hosting businesses are owned by entrepreneurs that found themselves in the business mostly because they “fell into it” while trying to figure out what they wanted to do when they grew up.  Many of these businesses have languished, but some have turned into large and very profitable businesses.

It is a very good idea to value/evaluate your business once per year to determine if it is getting ahead or falling behind and to help in making the best financial yield decisions when considering options and strategies.

Today, the hosting industry is so fragmented with “niche” products and services that it is unreliable to simply apply a “rule of thumb” to arrive at value.  It is common to hear of hosting businesses being valued at some multiple of gross income or “n” amount per account, but in reality, that is so wild and varied that the only true “rule of thumb” today is “it depends.”

Hosting businesses typically have a market value of somewhere between 6 months and 2X annual gross sales.  The wide variance depends of the type of accounts and services, the amount charged per month, the billing method, the control panel, the platform, the overall size of the operation, the brand name, and about 25 other metrics, not the least of which is gross and net profitability of the operations/accounts. 

Often there is talk about “this deal or that deal.”  Anything you hear should be taken with a grain … make that a handful … of salt.   People lie… a lot.  There is a huge tendency to embellish the facts to suit the situation and the ego.  There is an unlimited range of creativity in the minds and hearts of gossips about “facts” that can be construed to meet whatever illusion a person wants to make.

There is an old saying, “What the big print gives, the small print takes away.”

Deal terms, whether it is cash or some formula for some future potential money, is huge.  It can appear that on the face of the deal, a seller is to receive $1 million, but only $100,000 of that is cash, and the rest may be for (worthless) stock or promises or uncertain future events or performance.  In the end, the actual receipt is only, say, $100,000, but at the cocktail parties and the conventions, you hear that “such and such sold for $1 million!!”  It’s good fodder for drunken delusions, but the reality is far from the facts.

Market conditions and valuations are changing as quickly as the technology of the Internet itself.  Plans and services that were once in high demand and profitable are rapidly displaced by new and improved services that are cheaper, faster and better than what you are offering.  Worse still is the “predatory pricing” tendencies of major players who are literally willing to invest millions of dollars in technology and infrastructure and lose big money to scarf up market share and “leap from” the competition.

Large players like, Yahoo!, Google and Microsoft are investing heavily in data centers and “cloud computing” technologies that will almost certainly render most, if not all, current hosting services obsolete or non-competitive within a short period of time. 

The hosting industry is poised for a major reshaping and shake out.  While it has been a very profitable business for independents, that very fact makes today’s operators prey for the Godzilla predators who are now poised to scrunch the little guys much the same way the large ILECs have squeezed out all the independent ISPs and CLECs.

Valuing a hosting business is too complex to simply apply a “rule of thumb.” Technology and market conditions are changing rapidly.  It is best to seek a professional opinion and consultation about the current and future value and potential of an operation.

David Matthews is owner of Hypoint Company, a leading company specializing in M&A/business brokerage of Internet businesses.  Click here for a free preliminary market valuation.

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