John,
My error, sorry about that.
But I disagree still with your comment. I think I may be being
misunderstood.
I'd argue that a company doing millions of dollars and/or Smaller High ARPU
business are LESS LIKELY to get higher Multiples.
The reason is that the businesses are already matured if they are doing
that, and the "potential" is not what is being sold, because the "potential"
had already been realized.
So a mature business is bought on multiple of "revenue".
Where high multiples are given are for very young and non-matured companies,
when the yearly revenue may still be very very small, sometimes even a
fraction of what the investment was to build the network intially/recently.
Higher multiple does not necessarilly mean higher profit/ROI at sale time.
There is a misconception that I often hear from buyers, "Why should I pay
you more than it cost you to build your network, or for me to build a new
network on top of yours with newer technology?" The reasons is that one's
network is a "engine" to generate revenue. There were many costs to build
the network way beyond the cost of the equipment itself. Contract
negotiations, planning, demographics, Site planning, labor, brand awareness,
time to market, first in real estate advantage, etc". The longer someone
waits after building their network to go to the deal table, could mean
lowering their multiple, but the longer they wait, the more likely they'll
have more revenue to get a multiple on. The only time soneone should get
less money for their equipment installed than they paid for it, is if it has
lost its value because it has become obsolete or inadequate for the job
compared to new trends in technology or the market place.
Thats is why a seller of a 802.11b network will get very little value for
thier infrastructure, but a Alvarion or Trango type network will be more
likely to hold its value. I'm uncertain what a 802.11a Mikrotik.StarOS type
network would evaluate for. It's not certified/legal, but it still has
current day speed, and as advanced features as most would ever need. I also
think a lot of this depends on who being sold to. If you are selling to a
telco, I'd argue that many Unlicensed networks will not get full value
consideration for the hardware infrastructure. Thats just because of the
hype to need WiMax, or higher bandwdith technology that is telephone grade,
such as 100mbps and gb technology. But if you have Canopy and selling to
earthlink, or using Mikrotik and selling to another Mikrotik WISP, or Trango
selling to a Trango roll up, I'd argue that having that gear is an asset. I
think getting the beset evaluation is picking the right buyer for your type
network. We could go top the extreme and argue that if you are selling to a
national Hotspot roll up, You'd be worth more if your network was 802.11b.
Tom DeReggi
RapidDSL & Wireless, Inc
IntAirNet- Fixed Wireless Broadband
----- Original Message -----
From: "John Scrivner" <[EMAIL PROTECTED]>
To: "WISPA General List" <[email protected]>
Sent: Sunday, December 03, 2006 1:11 PM
Subject: Re: [WISPA] Network Valuation Considerations
Tom, I do not mind having my posts clipped for content when replying but I
do mind it when you do it mid-sentence and change what I said. My sentence
read, "Nobody in unlicensed is going to get 6X unless they have a network
doing 10s of millions of dollars a year in revenues or a smaller network
with an ARPU of say $500 per sub. Then maybe I could see 6X."
Tom DeReggi wrote:
Nobody in unlicensed is going to get 6X
Thats where you are wrong.
Actually I do not think I am wrong. If you can find a single case to back
up that I am out of line in my thinking then please share it before saying
I am wrong. I do not think 6X has ever been paid unless there were some
other outrageous value propositions involved in the deal. I do not think I
am wrong.
However, the value of a higher Multiple is relevent to the amount of
customers one has and what stage of development the company is in.
For example, If I bulit a network today, the very first day after it was
turned live, there would be Zero customers and zero revenue, just monthly
loss for the reoccuring fees that the company obligated themselves to.
Would you then say the company was worthless because it had zero revenue?
From a resell standpoint, at that moment in time, your company could well
be worth less than what you paid to build it. It is just like driving a
car off the lot. It depreciates thousands of dollars the first few feet
off the lot.
Selling on multiple of revenue would be stupid. If your neighbor thought
you were a threat and wanted what you built, you would sell for the "cost
to build" + ROI for creating the "potential". Its very possible that a
6X evaluation 6 months after starting would be no where near the same
profit margin in a sale as getting 1X after the second year.
Let's get this straight. I was not insinuating that the 6X had to include
the assets of the company. There is always a settling of debt and equity
in a deal like this that has no part in the valuation of the multiples of
revenues. It looks like this (multiple of revenues + cash + assets - debt
= selling price) At least this is how I have done it when working with
others on both sides of the table.
I got a 6X offer a number of years back and turned it down, because I
like the business, I wasn't done yet, and it was way to early in the
development of my company relating to revenue. If you bought a race
car, would you sell it for revenue, before it ran its first race? Or even
First year at the track? No. People buy the race car, for the hope it
will allow them to win races in the future. Buying Alvarion is like
buying a supercharged race car, that you want to guarantee can hold up on
the track year after year without blowing engines. Where the trick comes
in is having the revenue and the infrastructure in top form, racing to be
the first to the finish line, to have as much revenue as poissible in the
shortest period as can be, so infrastructure still has the highest value,
so at evaluation day, you can maximize a ROI.
I'm not saying Alvarion or Mikrotik is better for a WISP, I'm just
saying, each of them has clear benefits over the other, and Alvarion's
clearly is ruggedness. And that can't hurt an evaluation.
> (zero tax deduction for equipment
depreciation).
Great Point. That also reminds me that owning the CPE outright may not
always be an advantage in an evaluation either. The buyer gets hit with
heavy Property tax every year, that adds up to a significant amount.
Property tax? Explain please. I do not know what you are talking about
here. I have always thought of property taxes as having to do with real
estate. Are you talking about having to pay taxes on asset values after
depreciation?
We are concidering owning the gear not more than the first year, and then
switching to term contract after the first year, or giving it to them
right from the start under a cancellable term contract, and (then when
they renew the contract -idea 1), we give them the CPE, and secure the
term contract with the gear. Because you can gift anything under $600
with out 1099, and CPE cost is less than $600, You could by pass property
tax, sales tax, Possibly still get the full deduction of the gear
(section 179), and still have the security of having term contract with
subs to help bank financing and evaluations. This is a mute point for
people that lease, but for people that pay cash, this may be a better tax
way to do it.
Tom, sorry to act like your 6th grade English teacher but the term is
"moot point" not "mute point". Remember Tom, a friend will tell you if you
have food on your face at dinner. You had some on your face.
Disclaimer, I'm not an accountant, and still checking the viability of
the idea. The end user contract can be cancellable any time without
penalty, they just have to give you the gear back as condition of
breaking the term. The only disadavantage I saw of this, is that on the
balance sheet it would show less assets owned by the comapny, but it
could still be reflected on the books as a dollar value of "security" as
collateral for revenue.
Thanks to the accelerated depreciation schedules and $150K per year of
direct expensing of CAPEX items each year you can usually limit any tax
liability related to owning the CPE gear these days.
Scriv
Tom DeReggi
RapidDSL & Wireless, Inc
IntAirNet- Fixed Wireless Broadband
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