How to Price Your ISP When It's Time to Sell

The key to maximizing return on your years of investment and hard work is finding the buyer for whom your assets have the highest value.

by Christopher M. Knight [July 12, 1999]

You've made the big decision. After years of building your successful ISP business, it's time to bail out, cash out, get out, and burn rubber down the road into the sunset . . . but how do you put a price tag on your ISP? How much should you ask and how much can you get? This article explores some of the options.

For a market to exist, a willing seller must be matched with a willing buyer. It doesn't matter how much you want if there's no one in the market willing to pay what you're asking. So the goal is to look for the buyer that can maximize, leverage, utilize, and value your ISP most highly.

ISP industry idiosyncrasy
Outside of the ISP industry, many non-public businesses are valued based on some percentage of annualized sales revenue (typically 1 to 5 times annual earnings). Historically, however, the ISP industry appears to prefer to price companies based on a value per subscriber, which is then multiplied by the number of subscribers to arrive at an asking price.

That's the theory. In practice, buyers' contracts often specify that the seller gets paid only for the subscribers that remain with the new ISP after the deal. Typically, if you get more than 80 percent to convert to the new ISP, you are doing well.

Imperfect as it may be, the subscriber value method is a good place to start in determining an asking price. Some of the major factors that help determine a value per subscriber are:

• The size of your subscriber base (bigger is better)
• Your average revenue per subscriber
• Your geographic POP situation is in relation to the buyers needs
• The percentage of your subscribers paying by credit card or electronic draft (as opposed to printing invoices or terms)
• Your growth rate, in terms of your marketing flywheel and its ability to keep bringing in new subscribers after the deal is made
• Your churn ratio (lower is better)
• Affiliate, associate, or computer dealers signed up to hawk your services
• Who will be paying your early circuit- or service-termination expenses, if any

Tip: For the typical ISP with around 2,500 subscribers, the current going rate (July 1999) is between $150 and $400 per subscriber. Your mileage may vary. The larger you are, the more power you have to fetch higher valuations.

Physical assets
Note that the above discussion says nothing about the value of your network, servers, dial-up access switches, vendor agreements, or anything other than customer/subscriber information. Some buyers will ask for these assets to be lumped into the deal, but I'd recommend selling them separately—or, if part of the whole deal, itemized, so you know what you're getting for them.

Those pesky details
Finally, here are a number of items that many ISPs fail to think about or plan for when they sell out:

• Getting paid, post deal, for additional subscribers that keep coming from the marketing flywheel you spent years building
• A low conversion rate to the new ISP because the transition wasn't handled carefully or smoothly
• Early T1 or circuit-termination or lease-shut-down charges (these can add up to $ tens of thousands)
• Yellow page and other marketing costs under contract for the remaining year, on which you forgot to get your new buyer to pick up costs
• What to do if the ISP you sell to botches up completely and your reputation gets dragged through the mud because of their incompetence.

Tip: Seek out the ISPs who are seeking to aggregate a couple dozen regional/local ISPs to take them public in the near future. These deals can bring you much more than the standard ISP subscriber-based buyout—if you don't mind the wait and the risk.

One other resource you may want to check out is ISP-Planet's Subscriber Values table, which lists valuations-per-subscriber of the largest publicly traded ISPs.

 —End

Here's to Your ISP Success!
Christopher M Knight—Founder and Managing Editor of The ISP-Lists

Related story: Get Top $ for Your Hosting Business  Christopher M. Knight