In determining a sale value in terms of "multiple of annual revenue", a
whole range of values have been reported as "fair", ranging from 4x monthly
to 4x annual.
Which is it? I think most make a mistake by focusing on industry historical
record, instead of looking at the most relevent factor, one's own business
plan.
One's business plan is what determined the calculated ROI, and what the
financial return is for the technical decissions that are made in one's
business. The pre-defined ROI, (if gaols are met) heavilly factors the value
of one's network and their business model. Technically, what gear someone
uses, what market they go after, or the size of their business is
irrelevent. If you use more expensive gear, you will ahve a longer
precalculated excepted ROI, (which has a defined value), and therefore your
multiple should be LARGER to cover those additional years defined in the
plan.
This is what I mean...
When I started this business 5 years ago, it was not uncommon to have a two
year ROI per subscriber, just on equipment alone. (Alvarion 5 years ago.).
IF the business owner got into this business initially knowing and
understanding that there would be a two year ROI (2 x annual), it has
established the MINIMUM value of the network in a sale (what it would cost
the buyer to rebuild, and obtain the customers, without any FREE revenue
that may have already gotten its ROI). For example Selling it at 6x
monthly, would be stupid, as one would be selling it for 1/4 the cost that
the seller was initially willing to invest to start the business for the
planned ROI. Any thing above 2X annual, would be the additional value that
the business has created above its planned business model, and what profit
the seller wants to make for creating the ROI. (The only exception to this
would be, if an ROI has already been acheived, and the network is degrading
and loosing its useful life).
Times however are changing. Its not uncommon for business models to be
based on receiving a 3-6month ROI on CPE, or 12 month ROI on all costs of
customer aquisition. For example if OEM radios are used that cost half the
cost. The OEM radios may hold their value jsut as good as name brand gear,
its just that their value will be a lower number, as on the Business plan
its reduced value is already reflected by the lower cost of the gear. So I
would argue, that multiples should not be offered on revenue, but instead on
factoring ROI.
For example if the ROI on a network business plan is 6 month. Then it would
be logical for the starting point of the evaluation to be 6X monthly
revenue.
The point that I'm making is that the multiple that is fair depends on the
investment that is made initially, and due diligence is the process to
verify that that business plan was executed, and money invested was spent as
represented, and not just wasted or burned.
Sure there are many other factors that effect end game evaluation. New
market trends, hype, desperation, time, quality of staff, barriors to entry,
etc. But in defining a value it all starts from a basis, that first must be
defined. That basis, is a WISP's business plan. A WISP that has a clear
business plan, can justify their basis for the starting minimum acceptable
multiple, before considering potential.
If a business was built on a 2 year ROI, including what fair salaries would
be, and the business owner did not take a salary (for finance reasons,
prefered to invest it in the company), he would be entitled to add
additional dollar to the sale to pay him back for his investment (waived
salary) as calculated what the salary should be in the acceptable business
plan. In otherwords, an evaluation should not be penalized because the
seller did better than his business plan because he made sacrifices as a
form of investment.
Why this is relevant is that very few WISP, have reached ROI on their
business. That is because, they continue to reinvest their profits in
growing their business, and they should not be penalized for doing that in
their evaluation.
A company that finances everything out 5 years, may then have a longer
duration to reach an ROI which needs factoring to make relevant. For
example, financing out longer may imporve profit or cashflow, but by the
time the equipment (and cost to obtain subscrier) would be paid off (in 5
years), the WISP would may have already reached Multiples of an ROI, as
money was taken our early in advance of paying off the investment tha
tgenerated it. So if the WISP sells near the end of the finance term, the
WISP deserves to make a higher return on the investment, because they
already paid back the costs to obtain client. But if the WISP selling early
in the finance term, you must deduct from the mutiple of current revenue, a
portion proportional to the unrealized investment. For example if a 2 year
ROI is standard acceptance, and the current finance has a payoff term of 5
year term, the buyer would be buying the remaining 3 years of investment,
and they'd want to receive 2X annual return on their investment (the three
years they bought), not Pay you 2X annaul to assume it a cost.
When a company sells, they are selling their calcualted ROI/Profit term, in
exchange for a quicker realization of a smaller ROI. People that have money
can afford to wait for the return.
So validity of a business plan, and proof of execution is what determines
the buyout price, as that is what calculates and proves expected ROI, not an
industry standard fixed multiple on current revenue. Due Diligence is to
allow the buyer to confirm that money was appropriately spent according to
the business plan that the seller is selling. You are selling a formula
that is in action. And the multiple you get is based on the formula that you
create.
You define the life of your business. You then determine the likely return
over that period based on the current revenue, which established the current
predicted ROI. Then you decide how much of that you are willing to give up,
to realize an earlier cash out. That is just the value of what you concrete
have on the table. And that is before we even talk the value of Potential,
how much the ROI can be improved by injecting cash into the business.
Where it gets hard is predicting the RISK, for long ROI. Can someone take
the risk of being able to maintain a business plan over 4 years, for a 4x
annual buyout? The answer is probably no, just on your created revenue. But
how convincing you are that they will be able to, will increase the
evaluation. Where the jsutification will come in on will be, HOW MUCH MONEY
will they be able to make above what you already created, because they take
over your business. The money they make on new created opportunity may be
way more than the dolars invoolved in the 4 year terms, In otherwords if
they can make more money inthe first year, than the risk of paying you for
four, there is little risk in paying you for four, because they got a ROI
for the transaction on the first year.
That of course is the "potential" that you sold them. Selling your
potential is what takes away the risk of a large multiple buyout.
What helps is being able to prove, churn rate and growth rate proprotional
to dollars invested. You need to proive that if they invest a certin number
of dolalrs they will reach economies of scale that will allow them to reach
ROI sooner.
The problem that most WISPs run into is.... They didn't meet their business
plan goals. And if they did not meet their goals, it very possible that the
WISP burned cash unsuccessfully executing their plan. Buyers don't buy
failure or bad investments. So if a WISP severally did not meet their plan,
its very possible that the the buyout price may never reach the amount that
the WISP initially invested, and an ROI may never be made. In that case, a
WISP needs to decide wether they failed, or wether they just had an under
estimated business plan, and wetherh the progress that was met was still a
beneficial business model. If the reached goals still have value, you just
change your business plan to reflect those results that were realistically
acheivable. Did you prove the business model a success or a failure? If
you proved it a failure, than you proved why you'll never get your ROI, and
then you get out before you lose any more, and sell your business for the
tax advantage.
You are not technically able to sell losses, but through a merger the buyer
can realize benefits from your losses, and that can translate to a dollar
value that you deserve.
Many people don't have formal business plans, because it is not absolutely
required to start a business, and it takes time upfront, without payment for
spending that time.
(Peter just posted some comments that some say it takes 200 hours to write a
proper business plan. Who has a month to work for free without a return?)
But where a business plan is absolutely required is proving the value of
your company for aquisition or investors.
My parting advice is... Most buyers want to focus on current revenue,
because its easy for them to re-sell revenue if they can buy low and and not
have to justify for resell. But the most relevant stage is to define the
BASIS (minimim value), because that is Easily proven. Once that is agreed
established, there is a starting point to discuss the final price based on
potential, and the value you created that you want to get a return for,
which is much harder to prove and justify.
Thats my thoughts of the day :-)
Tom DeReggi
RapidDSL & Wireless, Inc
IntAirNet- Fixed Wireless Broadband
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