ISP valuation guru Paul Stapleton told ISPCON attendees exactly which xSP businesses are selling for high valuations.

by Alex Goldman ISP-Planet Managing Editor [October 28, 2005]

Paul Stapleton, the banker who writes the ISP Ho$ting Report from Boulder, Co., had an unwelcome message for business owners attending ISPCON: if you don't have business customers, don't expect much cash up front if you sell the business.

Dialup owners have known for years that the value of the business is declining. But WISP owners were unhappy to hear that their companies, too, might not be very valuable.

People are buying WISPs, Stapleton said, but, he warned, "the term sheets can look draconian." Owners can expect a small amount of cash, perhaps $300,000, in up front payments, which is often far less money than they've already invested in equipment.

"There's no clean liquidity event," Stapleton said, reiterating the warning. Instead, companies often pay a small amount of cash at the time of the transaction and then offer shares or a later payment based upon the number of customers who remain with the acquiring company after a certain period of time.

When WISP owner attendees objected that they had invested money in the business, Stapleton reiterated his warning for the third time. "Deals are based on your business' revenue, not the amount of money you've invested in it," he said.

He said that as the WISP business matures, he expects it to become more like the cellular business, where tower companies are separate from providers.

Be an MSP
The one area in which companies are being bought at a serious premium is Managed Service Providers (MSPs). He said that the April 25, 2005 acquisition of Agiliti by VeriCenter is the sort of deal that ISPs should examine closely.

He said although Agiliti has a legacy of offering colocation, connectivity, and hosting business, it now emphasises higher end business such as software as a service, and had never been profitable. He said that this is the business to be in now. "In my opinion, guys who were here at ISPCON eight years ago are now in the MSP business. It's not dependent on the incumbent."

To his mostly rural audience, he added, "it's an urban business, a downtown business. There's a lot of data center space out there."

He said you don't have to buy your own data center when providers like Level 3 offer good prices. You can be in someone else's data center and tell your clients you have no signs "for security purposes."

"The MSP ecosystem is growing," Stapleton said. "Companies are facing increased security demands, broadband is growing, the number of domains is growing, and storage needs are growing."

Find a niche
Stapleton said that every ISP needs to find a niche, but plenty are available. He said ISPs can use FTTx with utilities, can enter the municipal wireless space, can work with hotels, and can specialize in digital video security.

He said that anyone who's been in the business has two skills that can be especially profitable. Every webhost (above a certain size, and epecially those with channel partners) should also be a credit card processor. The margins on credit card processing, Stapleton said, are high.

Stapleton also suggested that ISPs walk into a local business and offer to audit their telco bill, asking no up front fee. Instead, the ISP should charge a percentage of the savings (perhaps 20 percent). One ISPCON attendee spoke up at this point at said that the revenue from auditing telco bills alone had "funded eighteen acquisitions."

So if you aren't in the MSP place already, it may be time to change the business in order to grow it.

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