How you value a webhost

[studcent]

I realize that there are a ton of different variables going into the true value of a webhost. But is there any kind of recognized industry standard as a guide such as 1x yearly revenues? It sounds like in today's market, it is probably less than that, but I am wondering what the industry standard would be putting a proper valuation on a webhosting business.

We are looking into purchasing a small webhosting business as a way to get ourselves more familiar with that market. But it would really help if I had a better feel for the way these things are evaluated in the marketplace. Any input would be appreciated. Thanks.

[Steve_S]

Hi Jeff,

Welcome to the "Village" and best of luck :)

I moved your thread over to this forum and I hope you don't mind.

First thought: Long before you get to any formula for how to value the hosting business in your purchase, I would start with the reputation of the host in the marketplace and the hosts relationship with their current clients.

If you perform your "due dilligence" on this issue then and only then we move on to the next step. Price and terms mean nothing without this first step.

Sources to use:

Google including news groups
This forums archive
http://www.alexa.com/
http://www.archive.org/
http://www.boardreader.com/
http://www.webhostingtalk.com/

The above is a short list :) Next we move on to the whois records. All the data needs to be verified. Including but not limited to public records of a Corp/LLC etc.

You are also trying to verify what the seller told you with third party sources.

Good luck :)

[SinisterX]

WHT is def a good resource :) Steve I didn't know you posted over there ;P

[fcolor]

I would like to add one more valuable resource related to the webhosting business. You may check:

www.webhostdir.com
http://forums.webhostdir.com

regards
D.

[studcent]

I'm still researching to see what is considered the proper value for a webhosting business. I realize that there are so many factors that go into this and that every business is unique. But does a value of 2x-3x EBIT (earnings before interest and taxes) sound like a proper valuation? And that anything over 3x would be really reaching a danger zone in terms of over-valuation?

Another rule of thumb would be as a percentage of yearly revenues. It sounds like anything over 1x yearly revenues would really be too high a valuation. That a steadily growing webhost would be thrilled to get 1x yearly revenues in a sale and that most would fetch significantly less.

Any input would be appreciated. We are looking into purchasing a couple of small webhosts and my sense is that my partner is so eager to do a deal that he is over-rating the value of webhosts.

[Czar]

Web hosts live and die by their reputation and the quality of service that they provide. As such, reviewing the resources that Steve presented is invaluable in avoiding the lemons and identifying the gems.

Once you've established that a web host actually has a positive reputation (and no reputation is as bad as a negative one in regards to a transaction of this type), negotiate as low as you can below 1x yearly revenues. Personally, I wouldn't worry about EBIT calculations, since margins can and will change with ownership anyway. The one factor that I would need to see is that profit does exist, however small, just to verify that there will be no undue cash burn following the transfer of ownership.

Don't count on all of the clients staying following the sale, and take into account any dramatic promotions that the target host has been running. Some, for example, offer free hosting for a limited time which can inflate membership numbers, while others experience unsustainable bursts of revenue per client by charging hefty setup fees.

These few considerations taken into account, though, you're right to assume that anything under 1x yearly revenues is reasonable for a host with a decent rep. Anything beyond that would need to be based on extremely good word of mouse potential.

Definitely don't over-value a host, though. It's simpler to start your own from the ground up than to recover excessive costs incurred by a hasty acquisition.