We participated in a recent webinar sponsored by The Whir on "Selling Your Hosting Company" where a number of questions did not get answered due to time constraints. We have taken a shot at answering these questions below. Please don't hesitate to drop us a note (fstiff [at] chevalcap [dot] com) if you have any questions or comments.

Cheval Capital, Inc.

Disclaimer: This post is for general information purposes and is not meant to be taken as financial advice, a recommendation to buy or sell the stocks mentioned above, a comprehensive discussion of valuation or how to do the calculations discussed. Please be sure to consult your financial advisors when valuing your company, considering the sale of your business or making other financial decisions

WHIR Webinar Q & A

Q: I've been involved in a few hosting sales and acquisitions, and I'm curious if "poor documentation" as far as assets, revenue, etc is common?

- Unfortunately, it is common. It is particularly a problem with financials but also occurs in other areas as well. For some reason it seems that the owners of hosting businesses tend to be less focused on financial record keeping than we have seen in other industries. Unfortunately, this probably hurts the value they would get on a sale of their business.

The other part of the problem is sometimes responsiveness. A hoster may have or be able to get the information but is just very slow in doing so. This can hurt value if buyers get the impression that the data is not available or is dis-organized. It can also hurt the momentum of a transaction and cause buyers to lose interest.

Q: Does having a custom Control Panel typically negatively impact the valuation of a hosting business? Q: In shared, does the control panel used effect the value?

- Almost all buyers want to move customers onto their own control panel. That means the question is really about how easy it is to migrate from the control panel being used by the seller. If it is easy, then there is no valuation hit. If it is difficult then there may be a lower valuation due either to the cost/risk issue of the migration or that there are fewer buyers willing to undertake it at all. (Remember, it is not just custom panels, if you are on a commercially available, third party panel that is difficult to migrate from you may have the same issue.)

Q: Would factors such as virtually 0% "churn" over multiple years affect value?

- It would be very much of a positive.

Q: What is the average migration time when purchasing a average size hosting company?

- It is much too varied to give you an estimate. Some migrations are very simple and take a week. Some take months and months of planning and execution. It really depends on

Q: What effect will Cloud have on Shared?

- We're not very good at projecting the future but I'm not sure the Cloud will have much of an effect on the shared side of the business. I believe it's biggest effect will be in the dedicated/managed/colo areas,

Q: Are buyers interested in hosting businesses that are $50,000+ sales without infrastructure i.e a Reseller.

- This business would likely be a very attractive acquisition candidate as long as the Reseller owned the customers and they could be moved to the buyers infrastructure.

Q: Are Canadian hosting companies worth more or less than US firms? Does the different currency scare buyers off?

- For Canadian hosters that bill is $US and are selling the assets of their company, then no, there appears to be no overall difference in valuations with those in the US (that we can see.) However, companies that bill in $CAD do reduce the number of US buyers as well as the fact that in some cases Canadian hosters want to sell their business in a stock transaction vs and asset transaction (due to tax law.) Another potential area that can reduce the number of buyers is when support is offered in multiple languages.

Q: Do purchase price multiples change on company size?

- Generally they increase as you get larger. However, we've seen exceptions to this depending on the specifics of the underlying company.

Q: What's the rationale behind the lower market value on dedicated sales?

- We don't know for sure but there appear to be a couple of possibilities; (1) dedicated hosting does not seem to have quite the profitablity/economies of scale that shared hosting does, (2) it is much more costly & risky to migrate dedicated customers, and (3) overall there are fewer buyers for dedicated customers (perhaps as a result of 1 & 2.) Another possibility is that it costs less to add a customer via marketing. In other words, if you can add a customer by marketing for $800 why would you pay $1,200 to buy one?

Q: How are deals typically paid out? 100% cash at closing? Monthly terms? Can you tell us a bit about deal terms? Are there holdbacks? Any migration protections? Q: Is the purchase multiple effected by deal terms? Are they related?

- Deal terms can vary greatly but typically the bulk of the purchase price is paid at or near the closing of the deal with some amount 20-40% held back for up to a year as protection against false statements in the purchase agreements. The purchase price definitely varies with the deal terms. For example, cases where 100% of the purchase price is paid on closing are much riskier for the buyer (and less risky for the seller) and so there is generally is a lower purchase price. Cases where none of the purchase price is paid on closing or where the price can be reduced if customers leave are much riskier for the seller (and less risky for the buyer) and so there is generally is a higher purchase price.

Q: Does the quality of hardware affect sale with a dedicated host. White box vs Dell equip?

- We have not seen that big an effect although it does matter. Remember two things though about servers;

(1) When we talk about values and multiples, those reflect a price for all of the assets (including the servers) but not the liabilities. So if you have lease liabilites, those liabilities will reduce how much you net.

(2) If you rent the boxes on a month-to-month basis, there may be no deduction as in (1) but buyers that plan to move the customers into their own data centers will have to buy a box for them which reduces the cash they get from the acquisition (which reduces the cash they can pay you.)

Q: What does it cost to use a broker -- to the buyer? to the seller? How is the broker paid?

- The banker/broker is typically paid by whomever hires them. However with our list service, there is no charge to the seller as the buyer pays our fee of 5% on the first $5 million of purchase price and 1% thereafter.

Hillary Stiff