Best of the ISP-Lists

The Bottom Line On Valuation

The ISP-Investors list discusses how prices are made in the market for small ISPs.

[March 24, 2000]

On the ISP-Investors list in January, KR brought up an "evergreen" issue:

"I am considering acquiring a small ISP (500 corporate customers/500 private customers). Does anybody know any multiples that can be used for a quick valuation?"

One respondent pointed out that while there are myriad variables involved in ISP transactions, the type of valuations fall into two categories:

[BE wrote] "We have seen two general types of valuations: (1) private market and (2) public. Public transactions have their own unusual dynamic with multiples ranging from 5 times annual revenues to over 15 times annual revenue. Private market transactions have ranged from .5 times annual revenue to 3.0 times annual revenue. The lower range was usually for ISP's with less than 1,000 subscribers, little or no "other revenue" like web hosting, and no prospects for growth. At the higher end of the range were ISP's with more than 5,000 subscribers, web hosting or other revenue and a market with growth potential."

Another respondent posted figures that elicited a slew of posts:

[EL posited] "If cash or cash and note, 1.5 to 2 times the monthly recurring revenue less liabilities and assuming that they charge in a normal price range ($15 to $22) that you will be able to maintain."

[Jim argued that this valuation was unrealistic] "I can image anyone would buy at 1.5 to 2 times monthly revenues. If you charge $20 a month, that means $30 to $40 dollars a subscriber on a cash basis. A more realistic value would be 1.0 to 1.5 times annual revenues on an all cash basis and 1.5 to 2.0 times annual revenues on a part cash, part stock basis. Take a look at what subscribers become worth when they reach public status at www.isp-planet.com/subvalues.html."

[LB piped in] "These valuations are interesting from an industry standpoint, but realistic numbers for smaller ISP acquisitions are generally lower. I believe that 10 to 12 times monthly revenue is closer to the real number these days for less than 10,000 accounts, especially if you are selling to someone who's intent is not to go public in the near future."

A number of respondents pointed out that the subscriber base would effect the price of an ISP:

[GS added his 2 cents' worth] "Think more like $250 per subscriber for under 1,000. All cash if you're lucky. The ISP-Planet valuations are for 3,000 to 5,000 subscribers."

[Ed. note: ISP-Planet valuations are for much larger ISPs. It's very difficult to get prices for "small purchases" because the purchased company is usually private and the terms of the deal are rarely disclosed.]

[BE added] "The subscription rate can impact this valuation multiple in several ways. If the rate is $20 - $25 per month and the subscribers are all residential the multiple may be depressed as buyers will expect that competition will drive the rate lower in the future, and residential accounts suffer more churn than business accounts. If the rate is less than $15 per month the multiple might be enhanced because the buyer anticipates 'other revenue' potential and/or likes the competitive position of the relatively lower rate. At $9.95 not many competitors can beat you on price unless they go completely to advertising revenue and give the ISP service away for free."

[SR noted some other issues that affect valuation] "To what extent do these factors affect the valuation: 1) Being the only ISP in the area with local access numbers? 2) How important is the quality of infrastructure? and 3) Does the fact that we're quite profitable have any impact on our valuations, or do most potential purchasers see it simply as an opportunity to pick up X number of customers?"

The question of infrastructure sparked a small conflagration:

[GS opined] "In most cases buyers don't seem to care about the infrastructure. They are buying your customers; in many cases only the customers."

[MH strongly disagreed] "We own a 10000+ square foot NOC with multiple fiber connections and local loops that we own, rooftop microwave links, etc. Two to three times annual revenue does not even come close to meeting our investment in facilities. The 'formula' approach does not work. We think that buying customers from a virtual or 'near facility-less' ISP for up to three times annual revenues is overvaluing the business; it's only supported by an incredible combination of ready venture capital and stock prices."

Which caused one respondent to point out the inevitable bottom line:

[MB wrote] "If the facilities are required but the revenue does not cover the cost of depreciating the "facilities", then the business model is flawed. Until there is a change in the business model, your business is not worth anything by 'traditional' business pricing standards. That's not to say that 'dot com' pricing may not value the business differently, but at some point even 'dot com' companies have to return money (from operations) to the investors."

Related Articles
There's our interview about valuation with m&a experts at Fall ISPCON '99:
http://www.isp-planet.com/business/ispcon_valuation.html

For an article on post-acquistion problems, see:
http://cnn.com/TECH/computing/9905/10/isp.idg/

In October 1997 on the ISP-Investors list, Thomas Millitzer (who has since become famous for selling the URL "wallstreet.com" for $1 million, and claims to have sold $100 million worth of ISPs in 1999 at http://www.com-broker.com/) responded in detail to a similar thread. His full post is here.

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