CHEVAL CAPITAL, INC.

Metrics That Mean Money And How To Track Them

Hillary StiffJuly 2007

CHEVAL CAPITAL, INC.

CHEVAL CAPITAL, INC.

• Who we are– Investment bankers active in hosting/ISPs since 1996.– Completed over 92 Hosting/ISP acquisitions, 20 in 2006 and 11

YTD in 2007 including Endurance/iPowerWeb.• Who we have worked for

– Endurance Int’l Group, Verio, Rackspace, Nextel, etc.• What we do

– Represent buyers & sellers of hosting, telecom and related companies.

– Distribute a weekly deal listing with over 30 sellers, creating a deal marketplace small and mid sized companies.

CHEVAL CAPITAL, INC.

Why are some metrics important when selling your business?

• Consolidators want to know how profitable your customers will be on their systems.

• Platform buyers want to know how profitable your business is as it stands.

• All buyers want to know;– How fast you are adding and losing customers– What you own and what you owe.

• The profitability and growth rate of your business largely determines how much a buyer can pay. If the buyer does not know or have confidence in your numbers they will not bid or bid at a lower level.

CHEVAL CAPITAL, INC.

Minimum metrics to sell small firms to consolidators

• Annualized recurring revenues – The revenue your customer base would produce over the next 12 months with no changes.

• Annualized recurring revenue for each of your business types (e.g. shared, VPS, co-lo, etc.)

• Number of customers for each of your business types.

• Method of proving revenues (Paypal, bank statements, etc.)

• Customer List.

• Billing Frequency Detail.

CHEVAL CAPITAL, INC.

Annualized recurring revenue calculation

• Annualized Recurring Revenue is the most commonly used revenue base for valuation purposes.

• Illustration of how to calculate Annualized Recurring Revenue.

– 10,000 customers @ $10/mo x 12 pmts = $1,200,000– 15,000 customers @ $15/mo x 12 pmts = $2,700,000– 25,000 customers @ $25/qtr x 4 pmts = $2,500,000– 3,000 customers @ $100/yr x 1 pmt = $ 300,000– Total Annualized Revenues = $6,700,000

CHEVAL CAPITAL, INC.

Additional metrics that are often required & can add value

• Financial Statements

• Customer growth and attrition figures over the last 12-24 months

• Detailed customer database (without names)

• System and network configuration (e.g. number of servers, specs, loading, etc.)

• Support costs, activity levels, etc.

• Advertising costs, methods, results (e.g. cost per add)

• Deferred revenue detail

CHEVAL CAPITAL, INC.

Financial statements

• Generally necessary for platform and larger deals although some buyers require them on all purchases.

• Most buyers are interested in the Income Statement (revenues and expenses) fewer need Balance Sheets.

• Annual for the last two+ years and quarterly for the last four quarters.

• Can be very basic.

CHEVAL CAPITAL, INC.

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• Basic accounting software is inexpensive as is a part-time accountant to do basic bookkeeping.

• Waiting until you want to sell and can’t or having to re-create several years of financials can cost you a lot more money.