Best of the ISP-Lists

One Way Out

Members of the ISP-Investor list discuss how to value an ISP, and other important considerations when selling or buying an ISP business.

[October 16, 2000]

On the ISP-Investor list in September, MB asked,

"What is a reliable formula for establishing the value of a small ISP? Is it valid to base it on annual revenue?"

Two respondents offered reasonable ways to create such a formula:

[BL offered] "If you're going to base the purchase on revenue, it should be clear that the earnings are of the acquiring company, not the acquired. Because of economies of scale, the acquired company may not be profitable, but the accounts may be very profitable to an acquirer.

We put together a spreadsheet that calculates the net present value (NPV) of a sub; NPV is a formula in all spreadsheets. Then we put in a rate of return that's acceptable to us; anywhere from 10% to 20% is a reasonable number. And then you have to figure what percent you'll lose each month, and the monthly revenue, along with any liabilities that must be assumed."

[JN added] "The value is based on three very important factors:

• First, what's the average turnover for the subs?
• Second, can you put any guarantee on loyalty after the sale and are you willing to take a percentage of the payment only after the subs stick around for 3, 6, or 12 months?
• And third, what is the real cost per sub?

I have found that most good buyers are business people and not IT-experienced CEOs. When they look at the books and decide on the numbers, instead of the feel of what is happening with the tech world, they make more rational decisions."

JP suggested that the situation isn't that simple:

"To put it simply, there are no real 100% cash buyers for a small ISP at one times annual revenues. A cash buyer needs a return of his investment in 2 years or less in this industry, and that's not possible in that situation."

RS agreed, but noted that there are others ways to view the transaction:

"You may not be able to get a suitcase full of cash at closing, but one times revenues in freely-trading stock at closing, or close to it, is certainly possible for a small ISP. You could do much, much better that way; you could also do much, much worse — it certainly requires more due diligence from the seller. If I stay in business for three years, I am taking a risk on myself and my ability to satisfy my customers. If I get stock in another company that I have to hold for three years, I am taking a risk on some other bunch of yahoos.

Most people don't go into business for themselves because they think they can run it less well than other people. Of course, it makes a big difference whether you're selling to, say, Cisco, as opposed to Joe's Rollup of the Week, Inc."

—End